The Art of the Close

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Controllers and CFOs know that having a quick and accurate financial close is essential to manage your company effectively. Accurate and timely financial statements allow leadership teams to get a view of the organization’s financial picture and allows managers to make changes to improve performance.

We all can become relaxed in our company processes, but the financial close must be attacked with discipline and rigor. It’s early in the year so now is a great time to evaluate your close and improve your close process now so you have the best information as early as possible to make the best decisions. Test your close process this month-end.

I use a closing checklist with all of my clients. See an example here. The checklist lists the closing tasks, who is responsible and the expected completion time-frame. It is a simple process and keeps everyone on the same timeline. Using a closing checklist will improve your accuracy, completeness, and efficiency. You will have better information, sooner.

Once the general ledger is closed and the checklist is complete, a basic (or sometimes not so basic) reporting package can be produced, distributed, discussed, and reviewed.

I know many business owners who don’t look at their monthly financial statements very closely or they don’t fully understand what they are looking at. Some business owners don’t even look at their financial results at all. I believe it’s important to look at your monthly report-card (earlier vs. later) and to fully understand what they are telling you or trending toward. This holds teams accountable, which improves performance and allows you to make changes and improvements earlier to avoid any bumps and improve financial performance.

The other day I met with a very experienced and talented business owner who was surprised by his company’s recent situation – his company was profitable most months, but he was having trouble making his payroll. He didn’t understand the balance sheet very well. His accounts receivable and inventory were using all his cash. After a quick review of his financials and a brief lesson on asset velocity, the balance sheet, and cash flow, he saw his problem. He is developing ideas and solutions to improve this and breathe easier.

Are you experiencing similar challenges? I can help. Contact me!

The Second Half – continued

CA-cash projection

In my last post, I discussed the 2nd Half Year Business Plan (2HYBP) as an opportunity to reassess and re-plan the second half of your company’s performance for the year.  Hopefully, you were able to get your June financials closed tightly, analyzed the business trends and re-forecasted next two quarters.

I have all my June reporting packages completed, but I’ve had some challenges getting all the 2HYBP’s done – one of my clients is having trouble nailing down the sales plans.  And since the sales plan is the basis for the overall financial plan, we’re a little behind.

Maybe it’s paralysis analysis, but we are just finishing a deep dive into the sale forecast, slicing sales by product, by segment, by customer, by region, and by sales rep.  The sales forecast now is a driver and a scorecard.  The team is engaged and totally committed.  Sometimes it pays to be patient.  The rest of the 2HYBP is being developed around the sales plan.  The organizational chart got slightly reconfigured, and we added some additional expense provisions for a segment’s revenue growth and production efficiency.

We also developed goals around the cash flow drivers—primarily days sales outstanding (DSO) and inventory turnover.  This is a large global company and the impacts on small improvements are massive.  Plus, they have much too much inventory (calculated at 272 days).  We have developed plans to smooth imports and improve purchasing operations and feel we can easily drop on-hand inventory by 90 days.  Based on their sales volume, this improvement will add $17 million to cash!

The cash flow driver principle works the same way for smaller companies too.  Consider a $2,000,000 company with $250,000 in accounts receivable.  Bringing DSO to 35 days adds $58,000 of cash to the balance sheet.  Small improvements in accounts receivable and inventory turns are important to continually work to improve cash flow.

The 2HYBP goals should focus on 5 things from the financial side: sales, gross margin, employee efficiency, expenses, and cash flow.  How are yours doing?

 

 

Predicting the Future without a Crystal Ball

crystal ball

As a business owner, you need to be able to predict the future.

Verbeck Associates has been doing a lot of business modeling lately.  It must be the time of the year and the type of clients I’m working with now.  I am currently working with two turnaround companies and four startups – both require financial modeling for forecasting results and developing successful strategies to deal with tight cash flow.

We use business modeling to:

  • Develop internal goals and targets – and provide a budget and scorecard.
  • Determine feasibility and what-if scenarios to test growth and survival strategies.
  • Pitch new financing or new equity capital to show cash investment needs.
  • Evaluate capital investments and strategies.
  • Produce forward-looking financial statements for your bank and existing lenders.

Keep in mind: projections are wrong by definition. They are future-state, and no one has a crystal ball.

We can certainly get in the weeds with modeling – I run that risk all the time. That’s why I aim to keep it simple.  The more complex, the more confusing and subject to error. My models are generally simple 24-month forward-looking financial statements. Here’s how to take a simpler approach to reduce the number of inputs and reduce potential errors.

Take a higher 30,000-foot view first thinking more strategically in both the short-term and down the road.  For example, “Based on this revenue, we require this headcount and should be able to deliver x net income and cash flow.”  What would happen if we do this or if we do that?  This then develops into a more granular approach with a 24-month working model.

It’s interesting to observe the thought process of many business owners.  Most understand the income statement, but many have trouble with the balance sheet and the statement of cash flow.  All business models start with the income statement so it is important that we understand the revenue model, the go-to-market and sales plan. But that’s not enough. Owners need to understand product costing, product mix, margins by segment, customer acquisition costs, etc.

When I review all this with owners, I start with historical financials numbers for the last 24 months: revenue, margins, headcount, operating expense growth, accounts receivable and inventory turnover, accounts payable days, debt repayment schedules.  For startups, historical information is non-existent which can make this more challenging! We work with whatever information we have, and/or consider the following elements and questions:

Plan: The essence of a model starts with the sales plan.  What are the expected monthly sales by customer and by segment for this coming 12+ months?  Consider the basic business model of:

Leads x conversion = customers x number of transaction x average selling price = revenue.  See more discussion in an earlier article

Process:

Develop a realistic sales plan by customer and by product segment.  Understand units sold per month and sales potential growth.

Develop a detailed personnel plan (see template).  People are generally your largest cost and your biggest asset.

Based on the sales plan, understand the timing of raw material purchases.   This obviously depends on your business.  For one of my current clients who purchase a product from China, significant lead times must be considered.

Document all assumptions.  What is true and what you predict will happen.  Prepare a summary of significant assumptions document to attached to final projection printout.  The document walks through the income statement sections discussing the thought process with units shipped, sales growth, cost of sales, gross margin by product segment, selling costs, customer acquisition, personnel costs, operating expenses, interest, and depreciation – each line of the income statement.  Do the same with the balance sheet – documenting the turnover and asset velocity assumptions, cash and debt needs. (The forecast model and assumptions support the 13-Week Cash Flow process if your company is tight on cash.  More on that later.)

It’s essential that the assumptions are reasonable, supportable, and documented. And updated.

I like to go through this plan/process in three ways, producing a conservative, moderate and aggressive model.  This helps a business owner make wise decisions, and the more historical data that surfaces as time goes on, the more accurate the modeling can become. But you have to start somewhere — because you probably don’t have a crystal ball (at least not one that works.)

Image by Alexas_Fotos on Pixabay

 

 

 

 

 

 

Focus on Profit, Part 2: Increase Revenue

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When we desire to increase profits, we look at two means. One is to cut costs (click here for details from Part 1) and the other is to increase revenue.

Sales are the lifeblood of most businesses.

The Basic Business Model goes like this:

Leads x conversion = customers x average selling price x number of transactions = revenue x cost percentage = profit 

There are actually only four ways to increase revenue:

  • Increase the number of customers
  • Increase the average transaction size
  • Increase the frequency of transactions per customer.
  • Hone your prices.

Let’s discuss each of these.

Increase the number of customers.   We can expand our geographic reach, especially now due to the benefits of technology.  We can increase sales incentives for your sale team – reps and sales partners for new customers.  The incentives can be temporary for a short-term boost or longer term with a revised commission structure.  (Just be careful with longer-term commission structures. Once you give something to someone it’s hard to take it back.)

Also, capped or declining commission plans may need to be changed.  These can be unconsciously unmotivating and incentivize sandbagging and pushing sales out.  I prefer “big carrots.”  For example, instead of a decreasing commission percentage as sales volume goes up which seems like the typical model I see (10% for the first 100K, 8% for the next 100K, 7% for the next 100k), consider reversing it (10% for the first 100%, 12% for the next 100K, 15% for the next 100K).  Pay a higher commission to the higher producers.

Increase the average transaction size.   This is best done by sweetening the pot.  Help the customer want more of your product or that a higher level of your service is the wise, logical choice for them.  For example, add bonuses, additional products, and services to existing products to sell at a premium rate.  Bundle related products to incentivize a larger purchase.  Improve marketing so the customer sees all the features in your product that will solve a problem or ease a pain-point for them.

Increase the frequency of transactions per customer.  Simply put, make buying easier.  How difficult is your purchasing process? If your online shopping cart is hard to navigate, customers won’t come back. Run regular tests of how simple or difficult it is to make a purchase from your company whether in person or online.

Hone your prices. Increase or lower pricing based on research, trends, and customer feedback.  If you charge too little, the perceived value goes down. If you charge too much, you’ll turn away customers.

Take some time to consider these changes to increase your bottom line.

 

 

Focus on Profit, Part 1: Decrease Costs

cost cut

Why do people think profit is a dirty word?  I love the book Profits Aren’t Everything, They’re the Only Thing by George Cloutier.  George, who I met several years ago at his summer home in Nantucket, discusses why profits are such an important component of any business.

As business owners, we have tons of challenges:

  • Motivating the team (keeping all oars rowing in the same direction)
  • Taking care of customers
  • Forecasting production to meet anticipated customer needs
  • Marketing our products
  • Administrating a myriad of daily details like answering email, returning phone calls, and keeping paperwork up to date.

ALL of the above factors contribute to the “bottom line,” or profit.

And despite the hesitancy about the word, (“All those companies are just out for profit!”), profit is actually a GOOD thing. Profit is necessary for your business to be able to hire the best employees, develop effective marketing strategies, provide excellent customer service, and serve people for years to come, including making donations and helping to fund community service projects that align with your values.  In reality, when you drop prices to satisfy a few customers (or even one) you’re hurting other customers, your employees, yourself, and those you could potentially give to.

Most businesses I see don’t have profit as a forefront objective.  They seem to be in business for another reason. If that’s you, I suggest you re-think your opinion of profit.

Some businesses already realize that profit is beneficial. Maybe that’s you, and you want to increase profits. There are really only two ways to do so.

Increase revenue, or reduce costs.

That’s it.

The main role of a business owner and/or the company CFO is to be looking for ways to do one of those two things (or both.)

With cost-cutting, if it’s up to you alone, I recommend cutting and asking questions later. Rip the bandage off. I’ve made the mistake of overanalyzing cost reduction numerous times.  Your first instinct is usually your best. It’s proven that snap decisions are often as good as decisions that you took a long time to agonize over.

If you have to get group consensus, make sure you get the right group together. Gather as much data as you reasonably need, but don’t overdo it. Let everyone contribute their thoughts. Then, make a decision.

Be relentless with cost-cutting. Go through each line item. No item is too small.  Looking at the smaller costs helps breed a cost-conscious culture. Ask questions like,

  • Do we really need to be paying every employee’s full cell phone bill? (In the early days, when people had a private landline or cell phone, businesses would feel the need to provide a separate phone for business use, or reimburse employees for cell phone use for work. Now, there’s very little distinction and even kids have their own cell phones.  It’s become a personal choice and expense to have one. Most people would keep their cell phone even if they left your employment. So is it truly up to you to pay for one now?)
  • Do we need to continue using that vendor? Are there others that are more cost-effective?  Your suppliers are often the easiest place to reduce costs. Ask for more discounts or better pricing and terms.
  • What other perks are not completely necessary? I know of one company that provided coffee and soda for their office employees, without charge. While I don’t have a problem with some break room supplies, was it necessary (and arguably, even healthy?) to provide an unlimited supply of soda to the employees?

I know these are hard questions. And I’m not trying to be a mean guy.  Cost savings can be used for a better purpose, like employee training, increased salaries, improved marketing and growth–and maybe even–bonuses?  Ask your employees if they would be willing to give up cell phone reimbursement for the chance to have a bigger raise or increased bonus potential. You may be surprised by what they say!

Next time, I’ll share some thoughts about increasing revenue.

 

 

 

 

 

Is Your Business Growing, or Dying?

growing or dying

As of today…is your business growing, or dying? (This technically applies to our personal lives, too.)  Dying doesn’t sound good to me. I’d rather be growing.  That’s why I focus on constantly growing and getting better at what I do in every aspect of my life.

I teach the same to my clients. In some cases, clients need to do an about-face to get their organization back in the “growing” rather than “dying” category. (See this Journal of Corporate Renewal article where I was part of a round table discussing a business turnaround for an example.)

I remember talking with one of my clients about growing his $50mm energy services company.  These guys process about 14,000 invoices per month with an average invoice ticket of approximately $300. How would a company like this continue to grow?

The only way to grow any business is to grow the number of customers, increase the average sales value, and/or increase the frequency of customer purchase.  That’s it.

The key is to focus on improving each component.

I have used this simple formula with many types of companies including medical practices, construction companies, HVAC companies, truck parts distributors, job shop manufacturers, and technology resellers.  It’s a simple formula and it works.

Once you understand the power of this, it will help really grow your business.

Consider the following formula.

Number of customers x Average sale price x Frequency of purchase per year = Revenue

I put together a program for one of my client’s segment and had some amazing results.

Number of customers 1,000 1,226
x Average sale price 400 456
x Frequency of purchase per year 7 7.5
Sales 2,800,000 4,192,920 50%

Notice the geometric growth – a 22% increase in number of customers and 14% increase in average sales with small increase in frequency of purchase gives a 50% increase in revenue.

For the energy service company I was speaking to, we outlined a small increase in the number of customers 7% based on current growth trends and an additional service offering to increase the ASP $100 as follows:

Current Plan Change
Number of customers 14,000 15,000 7%
x Average sale price 300 400 33%
x Frequency of purchase per year 12 12 0%
Sales 50,400,000 72,000,000 43%

I suggest you look back at the prior 12 months of sales and get your actual numbers.  Don’t make assumptions here.  Most business owners I talk to make assumptions as to the number of customers they have and ASP, but when we get the actual numbers, their assumptions invariably are wrong.  Dump your invoice register to excel.  De-dup the customers or compare to sales by customer.  I also like to calculate average invoice value (total sales divided by total number of invoices).  This may be be an easier stat for your sales reps to focus on.

TIP – I love the simple trick in Excel to de-dup a list (data menu, remove duplicates), then use the sumif formula to get totals.  I use this trick all the time.

Once you have your actual historical data, develop creative strategies and ideas to increase each element of the growth formula.  Then EXECUTE a couple strategies and measure the results.  Optimize, then repeat; test and measure.

It’s the only way to grow your business.  Customers x ASP x purchase frequency = revenue.

 

It’s Not a Bad Word: Why Businesses Should Focus on Profit

profit

Profit is not a bad word.

You don’t want to be greedy, and you want your business to operate on values that go beyond money.  But if you don’t MAKE money, you aren’t really in business.

So let’s make profit is a fun word instead.

As defined by InvestopediaProfit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business’s owners, who may or may not decide to spend it on the business.

Profit is a reward for risk taken in the business.  Business is the wealth creating institution of society.

But many companies and CEOs I work with make the mistake of not focusing on profit.

My friend Bob Thies sent me the book Profits aren’t Everything, They’re the Only Thing by George Cloutier when I first started my consulting practice over 10 years ago.  This book changed my thinking, and it is one of my most gifted books.

At first, the author comes off like a hard-ass, with chapters titled, Love your business more than your family or It’s not economy stupid, it’s you, but his points are valid.  I later met George on Nantucket. He really isn’t a bad guy, but he believes these things.  We discussed his process to address troubled-company turnarounds which helped me create the turnaround framework I use today.

I have worked with hundreds of companies over the last 10+ years in my consulting firm.  Some companies I work with do very well and just need financial expertise on their team, but many of the companies that hire me are losing money and are having huge cash flow problems.  These companies didn’t focus on profit and let things get out of control.  These situations need immediate action.  Once you dig yourself into a hole with big losses and eroding retained earnings on your balance sheet, it’s hard to dig out.

The key is profit.

To be more profitable business owners must think profit in every decision they make with respect to customers (or patients in the medical world), product pricing, employees, vendors, etc. Owners need to understand the business complete cost structure; they need to think activity based costing (i.e. all costs – cost of sales expenses and all selling, general and administrative expenses relate back to product costing/segment costing/practice area costing).  CEO’s need to evaluate their customer profitability, vendor profitability, and employee profitability.  They may have to make huge personal sacrifices like missing the kids game or not taking vacation, and make difficult decisions that affect employees lives.  I’m not saying this should be a lifestyle, but there may be times it is necessary.

If your business is unprofitable, unless you’ve saved cash reserves when things were good, the problem need to be addressed ASAP.  The answers are generally apparent, although the solutions may not be.  We sometimes think, “Just sell more.”  It doesn’t always work that way.  Don’t bury your head.  I have done that, and it never works out.  Develop an overall operating plan, look at your cost structure and customer profitability and focus on hitting the numbers; live and die by the plan.  If you miss the numbers, re-adjust until you hit your targets–the most important of which should be PROFIT.

I can help you increase profits. Contact me.

The Art of the Turnaround

016_Vermont Aerospace

A business turnaround is part art and part science.  The art portion can be timing, external factors, luck, ability to get people to change, etc.  The science part is the numbers, the forecasting tools, communication, fixing internal factors, and negotiation techniques.  I focus on the science part.

The fact is most businesses are not performing the way we expect them to.  We have high expectations for our businesses.  Why shouldn’t we?  Why be in business with all the challenges and headaches unless you’re going to make money, create value, and fulfill your mission.  If the business isn’t profitable, the business isn’t viable in its current state – something needs to change.  Profit and cash flow certainly makes things more fun and allow different opportunities for growth and excitement.

If the business isn’t performing the way we expect it to, we need to turn it around.  We need to go the other way.

So for me, the basic principle for turnarounds is: take decisive action to improve productivity with improved processes or systems and hold the team accountable.

I have lots of experience with turnarounds some good, some not so good.  Did I mention, I was recently awarded 2017 Turnaround of the Year!  The team did an excellent job addressing the issues with this company, and we had fantastic results.

The turnaround process is certainly challenging, it can be fun or it can be ugly.  As leaders, we are managing time, money, and people.  We need to focus on each.  In my observations over the years, I find there are several key leadership principles for turnaround success:

  • The CEO needs to be ready and confident. This is an opportunity for change.  The key is overall leadership with the need for immediate direction.  Leaders need the courage to make changes and call the shots.  It is time for quick decisive decision making
  • Pick your team. Remember, the people who got you where you are now may not be the people to get you where you need to go.  The core team needs to recognize whatever you’ve been doing is wrong and needs to change – you likely need to bring in professionals and assistance.  Redevelop your relationship on the floor – these people know what’s going on and what needs to be changed and improved.
  • Develop a written plan with short-term action and accountability. Need planning and accountability with solid dates – The plan should be 3-week/3-month viewpoints.  See my resources for a Turnaround Checklist.   If you don’t know where you’re going, any road will take you there – from George Harrison’s song “Any Road”.  Develop an operating plan with forecasted P&L, Balance Sheet and document assumptions and KPI’s.
  • Get the facts and face the facts – get the numbers and determine exactly where you are.  You need to know where you are and figure out where you want to go.  Be skeptical of the data. The fact is most underperforming companies generally have bad, inconsistent data.  Ensure you have accurate, timely data.
  • Know your numbers:
    • Understand your cash flow. Use a 13-Week Cash Flow Forecast Model.  See my resources for a template.  Make the weekly cash flow update meeting with your key team part of your process.  Keep a short-term approach focused on liquidity and cash.
    • Understand your profit – 80/20 customers and products – best if we can allocate all the operating expense to get true cost with activity based costing
  • Have regular key communication with vendors, banks, and employees
  • Be prepared for Chapter 11.  Liquidating assets is very bad for the bank and can be a powerful negotiating tool, but it can become a slippery slope.  If necessary, understand the process.

I would love to help you through your turnaround process.

Think profit and go long,

/jon

The 3 P’s to Efficiency and Effectiveness

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Even the most mundane activities in life or in your business have many behind-the-scenes policies, processes, and procedures that guide and govern when and how they’re done.  Take for instance a road trip to from Syracuse, New York to Boston, Massachusetts. Just jump in the car and go, right? Not quite. That five-hour trip actually has policies, processes and procedures that will affect the drive.

POLICIES

Policies that govern the trip are first of all the NYS Vehicle and Traffic Law which says:  S 1180. Basic rule and maximum limits. (a) No person shall drive a vehicle at a speed greater than is reasonable and prudent under the condition and having regard to the actual and potential hazards then existing.

Those potential hazards are whether the road surface is paved or dirt. Construction and weather conditions will also contribute to hazardous driving. New York State has legislated that drivers observe and comply with those conditions as well as others such a speed limits or a traffic lights when the roads are without hazards.

PROCESSES

The process of driving to Boston is from a high-level view. I need to map out the route and the tasks involved within the overall process. The car needs a full tank of gas before departure. Water and a few snacks need to be ready along with a suitcase packed with the clothing and technology needs. Leaving at 7:00 a.m. and taking the NYS Thruway should get me to my destination around noon.

PROCEDURES

Procedures get the trip underway. They are the detailed steps to perform the activity. Make a left hand turn out of the driveway. Then left onto Main Street, left onto Route 5 to the NYS Thruway to Massachusetts Turnpike to the Boston exit.

It’s the same with most business activities and backroom processes. I just completed a project improving backroom processes for a relatively large organization. We initially brainstormed significant processes with 80/20 thinking to ensure we selected significant processes.  I had eliminated this step before and spent a lot of time chasing small issues down a rabbit hole.  Begin with elimination in mind.  We then looked at the current state with a value-stream maps of the processes.  We took the policy, process, and procedure approach to developing and documenting each process.

This documentation process can be arduous at times, but final product can be awesome.  The documentation process also creates ideas for improvement.  In the project I just wrapped up, we not only created team synergy, we estimate the company eliminated over $300,000 in annual cost and created additional value for the business.

Can I help YOU with your policies, processes and procedures? Contact me.

Business Owner Mistake: The Basic Profit Model is not Leveraged

As business owners, we must always leverage the basic profit model.  We are in business to make a profit. The basic profit model is simple, but powerful tool and works for any business.

The formula is:Profit

  • Leads x Conversion Rate = Customers
  • Customers x Number of Transactions x Average Profit per Sales = Revenue
  • Revenue x Margin = PROFIT. 

Medical:  Old patients + new patients = Patients x average revenue per office visit = revenue.  Revenue x (1-(revenue-cost) = profit.

Distribution: Number of invoices x average per invoice = revenue.  Revenue x margin = profit.

Manufacturing: Customers x average invoice less cost per unit less operating costs = profit.

It’s all the same basic formula:   Leads x Conversion Rate = Customers.  Customers x Number of Transactions x Average Profit per Sales = Revenue.  (Revenue- Cost) /Revenue  = Margin.  Revenue x Margin = PROFIT.

Let’s break it down:

1) Leads multiplied by how many people/companies/patients actually buy from you equal your customers.  You know your current customer base proven by your invoice register.  How can your marketing efforts improve to increase the customer base?

2) Each customer (or a patient if medical practice) purchases a certain number of times per year at an average profit per invoice.  Look at your invoice register to determine the actual historical numbers.  How can you increase purchase frequency?  How can you increase the average invoice value?

3) Sales multiplied by margin equals your profit.  How can you reduce your costs and increase your margin?

A slight increase in any of these components can have a dramatic effect on your net income.  First start with your actual numbers—do not make assumptions here.  Develop plans and goals to increase some of the variables.  See the linked spreadsheet to see the power for the basic profit model.

For small and medium-size companies, I like to focus on average transaction, number of transactions per year amount, and gross profit.  The model on the linked spreadsheet is based on actual results with a small truck parts distributor.  We increase .25 leads per day, increase average transaction size from $189 to $225 and increase gross margin 1/10th of a percent.  The impact to this company is a 32% increase in profitability.

For example, strategies to increase average transaction size include:

  • Change product/service mix.
  • Offer add-on products and cross selling of similar products.
  • Reduce number of low dollar customers: increase minimum orders, train sales staff.
  • Look at your freight policy. Increase your free freight threshold.
  • Bundle/kit products together based on customer needs.
  • Raise pricing. This is never popular with the sales guys, but this can make a huge difference.

As you grow and develop, however, things can change.  You may need to address capacity challenges – How is it possible to get more patients through the basic business formula with the current staff and processes, etc.  Fundamentally, the formula still applies, but you may need to address necessary growth challenges.

Run your own numbers and consider how an increase each of the levers can have a quantum effect on profit.  Even slight improvements over many transactions can have a huge impact.

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