QUESTIONS FROM CLIENTS

June 2009- © Joel Johnson

 

 

For confidentality reasons I have chosen to leave out the clients explanation of challenges he/she faces.

 

 

Now, for my questions: Within current market conditions, economic downturn, and facing reality, how is it possible to make plans for the future in a volatil industry, not  being absolutely sure we will be able to continue sales growth under these circumstances or increase margins during this period, while price seems to be king? 

 

 

What should we do?

 

WOW!  What great insight and concern you have for your current challenge.  Surprising, many business owners get trapped in major economic downturns simply because they are not aware of what is happening in their own industry and fail to plan for events of this nature.  At least you are well aware of what is going on within your industry and are out there seeking the answers that you need to keep your business viable.  Not only that, but you seem to be anxious to take your business to the next level.  Rest assured, as you know, it will not be easy, but it can be done.

 

THINGS TO DO

 

  1. Do not panic.  The worst thing you can do is go around yelling, “the sky is falling, the sky is falling.”  Even though it may seem to be, THE SKY IS NOT FALLING.

 

  1. Remain calm.  Fear is the destroyer of creativity and imagination and you will need to utilize both.  It is really hard to focus when your mind is frozen from fear.

 

  1. Think analytically.  Break things down to their smallest denominator and begin using your imagination.  Ask the hard questions and seek creative solutions.  Robert Shuller once said, “Yard by yard everything is hard.  Inch by inch, anything is a cinch.”

 

  1. Work harder ON your business than you do IN your business. 

 

  1. Make sure you have the right people in key positions.  Give them the necessary authority to do their job. Make them totally responsible for their area, with budget allocations and measured returns.  DO NOT MINI-MANAGE LEADERS.  If you do, you will become a rope pusher.  You cannot push a rope.  Try it sometime.  You lead by example and by pulling them along with you.  Buy in is necessary.  If you try to mini-manage your key people, you will not find the necessary time for working ON your business, where real solutions will come.

 

  1. NOTHING HAPPENS UNTIL SOMETHING IS SOLD.    You might be the best widget maker in the world, but if you can’t sell, your chances of success are slim and none.  Failure to invest in sales and marketing is a major error.  Sales and marketing is the motor that drives industry.  You should develop the best sales engine possible.  Sure, you will continue to do business with old reliable repeat customers.  That is, until one day they sell out, move to a competitor, go broke or die, which always seems to happen in tough times.  If you continue to rely on the strategy of relying on existing customers you will not be bringing in NEW customers.  NEW CUSTOMERS are the life blood of every business.  

 

Look at your financial statements and write down the average amount the company invested in sales and marketing for the past three (3) years.  If it was less than 1.0% to 3.0% of gross revenue, you probably view marketing as an expense.  If so, your thinking is flawed and you have probably already eliminated that expense in an effort to save money.  Sales and marketing, although it appears on your P & L as an expense, is actually an investment in your business.  It is the oxygen that keeps you alive.  Ever wonder why Coke Cola continues to invest millions annually to promote their name?   Everyone knows who Coke is.  It almost seems unnecessary to continue promoting their products, yet they continue because they know the day they quit, Pepsi will own the market.

 

If you are investing less than 1.0% in your effort to reach NEW customers, you are not planning at all.  Get busy developing your sales and marketing engine NOW.

 

  1. YOU HAVE TO KNOW.  Analyze your current financial statements.  Ask these questions:

 

    1. Run a cash flow projection.  Do you have enough cash to continue at the     present rate of spending until new orders come, are shipped and paid for?  If not, do you have available credit lines to sustain you during these trying times?  If not, ACT on this project NOW. 

 

    1. Cash flow and net profits are not the same.  Find ways to increase cash flow.  Speed collections, reduce overhead, etc.  You know the drill.  Cash is king.

 

    1. What is your Current Ratio?  Can you pay our bills?  Total current assets/Total current liabilities.

 

    1. What is your Acid Test?  Total current assets minus inventory/Total current liabilities.  This is the test most bankers look at to determine your ability to pay your current obligations.  If you cannot pay your current obligations, how will you service a new loan?  That is their question.  Bankers want to lend, investors want to invest, but they are not gamblers.   You should have at least $1 dollar in current assets available to pay $1 dollar in current liabilities (debt due in the next twelve (12) months).  More is better.

 

    1. How much working capital do you have available? Current Assets-Current Liabilities.   

  

    1. Can you service your current debt load? If your business is unprofitable, that is, it is not creating enough income after expenses to cover debt obligations and taxes, borrowing additional funds will just put you deeper in the hole.  It is vital that you analyze your current margins and if they are not sufficient, make adjustments now. While interest is a tax deductable expense and is shown on your income statement, principal loan payments and taxes are paid out of net profits and are reflected on your balance sheet.  It is not enough to bid a job by adding materials, labor and freight plus a little profit.  It is NEVER enough.  You must consider the entire operation and future growth when planning required margins.   

 

    1. Who am I?  How does the industry view your company?  Do they know what you do, how you conduct your business?  Do they see you as representing quality, quantity, price, or service?  A business cannot be everything to everyone.  It has to focus in order to establish its own business model. 

 

    1. What is your business model?  Do you offer “Quantity and Price,” “Quality and Service,” “Quality and Price,” Quantity and Service.”  You must decide in order to tell your story and in order for your targeted customers to understand what they can expect from you.  If you are offering quantity and price, you will not be able to offer very much service or quality, because you are dealing in low margins. Your competition has to face this same question. 

 

If your model is quantity and price, your customers cannot expect quality, although they always try. Can’t blame them.  If you make junk make sure you have plenty of insurance.  And if you continue to be the go-to guy for the lowest price, they will continue to look to you for the low price of the day. If you are bidding against other businesses, you should know who they are and what they represent.  A man’s reputation will surely follow him.

 

If you offer quality and service, you cannot compete on price.  You must sell your business as the best quality and service producer in the market.  If you have to give away your margins in order to survive, you are in the wrong business model.  If you panic you will be tempted to give away the store.  If your reputation is quality and service, the industry will trust you to deliver what you preach.  Check out Neiman Marcus and Tiffany Jewelers.  You have to find something that you can be the “BEST IN THE WORLD” at.  Build on that model.  Remember, “People buy people first, then goods and services.”

 

    1. Do you have an updated business plan?  You will need this document to  guide you into the future.  It is also required by most bankers or investors.  It will show them how you plan to grow you business in a profitable manner and how you plan to service debt.  It is a living document designed to take you from point A to point B.  It is your road map.

 

Plans are set in sand.  Goals are set in concrete.  It is not a document that is placed in a drawer never to be seen again.  It is a document that is kept on top of your desk, in front of your eyes and reviewed daily.  It is a map for you good future.  Without a map you can get lost.  Someone once said, “If you don’t know where you are going, you will surely arrive.”

 

    1. What is the maximum amount of business you can do in your current facility?  As an example, let’s say you have 30K sq. ft. of manufacturing floor space and that the average sales per square foot for your industry is $875. per sq. ft. Using these numbers you would have a maximum capacity in your present space of $26.7 million in sales.  Assuming current sales of say, $18 million, you would have to add additional sales of $8.7 million before adding additional space or adding a new facility.

 

Assuming you could max out your space, which is very rare, in the next three years, you would need to add an average of $2.9 million in NEW business each year for the next three (3) years.  In this case you could not expand for another 2.5 years (allowing six months for new construction).  However, because you have not had a sales department, your customer  base is small. Most of your sales are from two or three customers, and your business appears to be reversing.  It is fairly obvious that you must act fast to reverse this trend.  In order to service what must be a fairly heavy debt load from your previous expansion and be able to contribute to company equity, profitable sales must grow.  There is no magic wand.  It will require good planning and the ability to follow your plan.

 

Of course you can grow through acquisitions, assuming you have the capital to invest and management in place to grow the new division.  But that is a topic for another article.

 

 

8.  Don’t procrastinate.  START NOW!

 

 

 

 

TO RECAP:

 

 

THE KEYS THAT OPEN THE DOOR TO SUCCESS:

 

 

I know!  All this is easy to say, but not quite so easy to do.  However, remember this- “WE ALWAYS GET WHAT WE HAVE TO HAVE.”  If you don’t have to have it, you probably won’t get it.  

 

As Nike says, “Just do it!”