You’ve probably heard of the 80/20 concept (also known as the Pareto Principle), where 20% of whatever you are considering (i.e. workers, technology, inventory) is responsible for 80% of the results (productivity, sales, and profit.) The fourth quarter of the year is budget season and a great time to take a closer look at your overall cost structure within the 80/20 framework. It’s time to ask yourself what you REALLY need to run and continue to grow your business.

When addressing costs – start with the larger impact and more important things.  Dive into the right problems. 

Don’t start with something that will have a minimal impact.  I like to value stream map key processes with stickies and a whiteboard.  Note people and processes around the sales and delivery experience and the customer/vendor touch points like invoicing and getting paid, improving customer delivery, paying vendors, and maximizing cash outlays.

Here are three areas to take a careful look at, with an 80/20 perspective.

PEOPLE

So much of business is based on unknown revenue numbers, and people are your biggest expense. An unfortunate reality is that many times, the people who got you to where you are now are not the same people to get you to where you need to go next. They cannot change and develop as the business does. That’s why budget time is also a good time to review your organization chart. You’ll often see that 80% of your results are coming from 20% of your team. Can you identify the 80% that are less productive and think of ways to scale, or invest in increasing their contribution through training, for example? Are there ways to continue growing your revenue while not growing (and perhaps even reducing) your team as you look into next year?

INFRASTRUCTURE INVESTMENTS

Another cost that can be significant is Infrastructure investments – money you put into the business for tools, applications, equipment, and more. These generally come in what I call stairsteps, not in a linear path. It’s tempting to be attracted, for example, to the bells and whistles of new technology, but it’s quite possible that only 20% of the features would contribute to 80% of your results. Ask yourself if investment into new tech or equipment would overcomplicate the workplace rather than be the solution you need. Will the learning curve create other problems/costs? It’s essential to ensure that these investments will actually elevate productivity and address challenges.

For example, you may decide that a new ERP (Enterprise Resource Planning) system will streamline tasks and management of employees. This can be true! But if the system is overcomplicated, and you have to retain an on-call consultant for a year, is that an effective use of funds in the long run? It could be, but there may also be simpler solutions available using applications you already have. Perhaps some additional training on current applications so users can move from beginner to intermediate or advanced would cost less and work just as well.

Bonus tip: One way to help separate the problem and solution is to identify and address the pain points in one meeting, give time for the assigned team members to research potential solutions, and then have a separate meeting to consider the options they discovered. This allows your team to determine the core problem without having to provide potential fixes right away. A clear understanding of the problem can be extremely helpful in researching solutions.

VENDOR INVOICES / CREDIT CARD CHARGES

Face it – all companies are leaking, some worse than others. Another cost to consider is what your vendors are charging. It’s not unusual for companies to be paying for services and products they aren’t using regularly (or don’t need more of right now.) Again, 20% of the services and products you receive could be covering 80% of your needs.

I recommend that you review each vendor invoice and credit card charge for the next 45 days and determine if each item is necessary. When I’m doing this for a client, I ask the obvious question – “What is this for?” Other questions include, “Are the services billed leading to the expected outcome?” “Are you paying for a subscription for an app you only use twice a year?” “Are automatic deliveries keeping your supplies overstocked?” “Are these conference expenses leading to the collaboration, soft skill enhancement, or team bonding or are you essentially providing your employees a paid-for trip/vacation?” (If that’s something you want to budget for, fine, but be intentional about it.)

If you need a more objective eye, there is a group of consultants like my colleague Steve Thompson at Integrity Cost Consulting. He can analyze your vendor spend to look for historical overpayments. His company earns their fee based on the savings they find. I love that! I like to track savings based on hard savings AND process improvements as a critical success factor.

Cost analysis exercises are generally a helpful practice for most companies, even if they can be somewhat painful. Use this 80/20 framework to budget wisely.

Additional tips:

• Ask yourself not only about getting the best price – but getting the best value. 
• When cuts are necessary, be sure you cut deep enough the first time.
• Do cost analysis on a regular basis.

Need some objective input? I can help. Contact me!

When it comes to ways to grow your business, it may not be that you lack time but that you need to do some prioritizing. It’s important to constantly evaluate your growth and progress. With the year already well underway, it’s time to take a closer look at how your business is doing. Is it multiplying? Are revenues increasing? If not, here are three ways to grow your business.

Let’s dive into each of these and see how you can measure and improve your progress, using a fictional example of a mid-size coffee roaster, employing 40 people, and supplying over 50 coffee shops with custom-roasted blends.

Add More Customers

This is the most obvious way to grow your business. The more customers you have, the more potential sales you can make. Look at your metrics for new customer acquisition. How many new customers have you gained since this year began? If you aren’t seeing the numbers you’d like to see, do you need to adjust your marketing strategy or invest in new acquisition channels?

Example: ABCoffee expands their strategic social media campaign to target not just their base city and suburbs, but counties 100-200 miles away. Their sales reps do “coffee shop tours” of shops in this expanded area, sharing photos their marketing specialist then posts to encourage people to visit the shops, and leaving a packet of information and sample roasts to the owners of the shops, so they will consider carrying ABCoffee.

Increase How Much You Sell to Each Customer

Another way to grow your business is to increase the amount that each customer spends with you. Look at your average order size. Has it increased compared to previous years? Consider offering bundle deals, or upsell items during the checkout process. I’m sure you’ve seen stores that have multiple low-price items in the checkout area or have been asked online if you want to add “these regular items” to your cart. Always try to add another line item to an invoice and offer premium/higher-priced products to encourage customers to spend more.

Example: ABCoffee offers specials that allow regular customers to add free bags to orders over a certain size. They occasionally slip in samples of new roast, hoping to whet the customer’s appetite to carry more varieties. They host “cuppings” for coffee shop owners to do tastings of their coffee blends, and offer special pricing for orders placed at these events.

Increase the Number of Times a Customer Buys from You

You can also grow your business by increasing customer loyalty and encouraging repeat purchases. To measure this, look at your purchase frequency metrics. Have customers been buying from you more frequently this year? If not, consider implementing a loyalty program or offering discounts to encourage repeat purchases. Make it a desirable thing to be a regular customer.

Example: ABCoffee implements a wholesale customer subscription program that provides a 10% discount to customers that sign up for their automatic monthly delivery service, thereby increasing the frequency of orders (with the bonus of providing reliable and predictable orders to their fulfillment center, increasing efficiency.

By evaluating your metrics for each of these areas of potential growth, you can identify where your business is thriving and where there’s room for improvement. (There’s always room for improvement.) Maybe you’ve been focusing on customer acquisition when your efforts would be better applied to increasing customer spend or loyalty.

Remember, there’s no one-size-fits-all approach to growing a business. Find out what works for your specific business and customer base. By concentrating on these three key areas and monitoring your metrics, you can make data-driven decisions to drive growth and achieve your business goals.

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?

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.)

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