How to profit from profitability

Sounds odd, doesn’t it? But it’s amazing that business owners sometimes do not know what profit is. And how crucial is that in attaining your Business Plan objectives? Much has been written on the subject, but they tend to plunge into technical accounting terms all too quickly. We hope to clarify more within this blog.

A few simple thoughts for starters who wish to understand more about what profit actually is.

Being profitable is not the same as making a profit

Your business may be capable of generating profits on paper (and this is where the accountancy stuff can confuse), but making true profits (i.e. exploiting the Company’s profitability) is down to good management, pure and simple.

Cash is not the same as profit

Some folks feel that they are making a profit just by looking at the bank balance. If it shows a healthy surplus, they may assume that they are coining it. This ignores the fact that payments arrive at different times unrelated to related expenditure invoices.

Invoiced sales may show up as being profitable in the monthly Profit & Loss account, but should always be viewed in conjunction with a monthly Cash Flow forecast.

Control of cash flow is vital. Only if you know your inflows and outflows will you avoid a nasty shock somewhere down the line.

Net Profit is not the same as Net margin

This sounds pedantic, but Net Profit is a cash figure and Net Margin is the percentage expression of that profit as part of total revenue. Bank Managers are seldom impressed if a business owner does not appear to realise the difference!

Net Profit is not the same as Gross Profit

Sometimes, we hear business owners saying that they are profitable when they are not. This is because they see Gross Profit as the ultimate measure of profitability, when in fact it only measures the profit after deduction of the direct operating cost of achieving sales. Lurking further down lie all the other overheads, which must be deducted to arrive at a true Net Profit measure.

Debunking the fears surrounding ‘EBIT’ and ‘EBITDA’

These terms are sometimes confusing as they can prompt business owners to think that there are other measures of profit that they ought to know about; when in fact they just consider profit in a slightly different way. They are useful when comparing different companies in the same industry, as they strip away costs that vary from company to company – often handy when making comparisons with competitors when assessing relative strengths and weaknesses – not to be regarded as Something Completely Different.

Definitions:

EBIT is the operating earnings of the firm before interest and tax. It is a measure which indicates the firm’s earning capacity from regular operations and is helpful in analysing the company’s operational efficiency, ignoring interest and income tax expenses. As these two variables differ from firm to firm, it provides an ideal measure to compare performance with competitors.

EBITDA is an acronym for Earnings before Interest, Tax, Depreciation and Amortisation. It signals a company’s profitability and performance on the basis of operating decisions, ignoring the impact of non-operating factors like cost of capital, non-cash items and tax implications. As these factors vary from company to company, it allows the users to analyse the profitability of the company using an ideal performance metric. In this way, the comparison can be easily made between different firms of similar size and nature.

The true profit of a business is the only measure that matters when it comes to long-term success and – ultimately – successful exit, when it is the crucial valuation measure. Important to get it right from Day One.

Why business owners make the best salespeople

Good-SalespersonBusiness owners are often very keen to delegate sales responsibility to qualified salespeople – but is this the best choice for their growing business?

As the business grows the owner increasingly needs to let go of the detail and concentrate on doing those tasks which add the greatest value for the business.

It is very commonly the case in small businesses that the owner, the person who actually started the business is a practitioner – an engineer, a scientist, a marketing or design guru, a recruitment specialist and all the rest. They usually do not have any kind of sales training so their understanding of the sales process and selling activity is limited or non-existent.

Consequently, there is often a very strong desire on the part of the owner to delegate responsibility for sales – and often as soon as humanly possible!

But, however much the owner may dislike selling, it is often the owner who is the best sales person for the business – and usually by a very long way. This may at first glance seem quite counter-intuitive. Here is a person with none of the training and none of the skills, trying to do a job they would rather not do be doing – how can they possibly be successful?

Core competencies

The answer is fairly straightforward. Almost every study of buyer behaviour highlights the fact that buyers value certain things very highly – and that competence in these “core areas” is key to securing their trust and confidence. The core areas are:

  • Confidence in their offering
  • Sound and detailed knowledge of their product or service offer
  • The ability to listen and correctly interpret the client’s requirements – and propose an appropriate solution
  • A good understanding of the competition
  • Knowledge of the marketplace and best practice

The trust and confidence of the buyer are clearly crucial if you want the win business. You do not need to be a rocket scientist to recognise that the person who started the business will have at their command a better understanding of all of the points above than any newly appointed salesperson.

Passion & Objection handling

There are two additional factors to take into account with this analysis. Firstly, the owner is passionate and committed to the success of the business; their enthusiasm is compelling and infectious – it is his or her livelihood after all.

Secondly, the owner has dealt with rejection and disappointment as a natural and necessary part of getting the business established.  A push back or an objection from a client is unlikely to come as any surprise to the owner – they have heard it before and will usually know how to turn the argument to their advantage. Dealing with sales objections confidently and knowledgeably comes very naturally.

The right salespeople, at the right time

Of course it make sense to take on salespeople and start them on the journey of acquiring this knowledge and understanding as soon as possible. And there are lots of sales tasks that can be delegated to them along the way. But for the big strategic deals – the ones that you must win – the owner has to lead the charge.

In companies where the owner delegates responsibility for the sales too soon, all sorts of problems and difficulties can arise. The owner with little or no formal training in sales, who has never hired a sales person or never managed a sales team is almost certain to make a lot of mistakes. They will take on the wrong person, not appreciate what resources and support the sales person will require, lack the understanding to set and measure appropriate performance targets. And, a lot more besides.

What started out as delegation is nothing less than abdication – a complete loss of control – and things can, and often do, go horribly wrong.

If you’re struggling with sales or sales staff or if anything in this blog resonates with your own experience, feel free to call Bob on 07940 526801 or email him for a FREE initial consultation.

Selling your business

Increasing business profitability with 4 simple steps

As a general rule, I find that people have a tendency to make things more complicated than necessary. This is especially true if the problem they are trying to solve seems to be difficult, or the objective they want to achieve is elusive. Under these circumstances I think we all quite naturally look for complicated answers. Increasing business profitability is a good example of an issue where it is easy to overlook the straightforward and simple answers.

I will go into each in a bit more detail below but my four “no-brainer” tips to increase business profit are:

  1. Never give anything away . . . ever!
  2. Look for ways to reduce costs – and do this routinely!
  3. Upsell or cross-sell at every opportunity!
  4. Send the invoice and collect the cash promptly!

1. No Freebies

Most small businesses would be horrified by the suggestion that they give stuff away – but most do. The discount that wasn’t really necessary, the training course that should really have been paid for, the accessory that should have been sent with the original order but had to be shipped separately, the second visit to the customer when the problem should have been fixed on the first occasion. Every single example quoted above – and dozens more besides – are just different ways of giving stuff away. Stop being so charitable and the profits will improve.

2. Reduce Costs

Reducing costs is absolutely the easiest way to improve profitability.  And yet, most small businesses seldom analyse their direct costs or review their overhead spend. The only way to do this properly is to adopt a “zero-base” mentality and challenge each and every item of cost on a line-by-line basis.

Surprisingly, one of biggest and most common areas where small businesses sustain and tolerate inflated costs is in their payroll or wages bill. This might sound crazy when everyone appears to be “so busy”.  Busy they may be, but are they doing productive work, in an efficient manner? In small businesses there is often a reluctance to address the issue of poor individual performance or staff discipline. The result is low levels of productivity or, in other words, higher costs than necessary.

The other big, and usually hidden culprit, in most small businesses is poor quality. Every time you get stuff wrong – and have to do it again – you drive down profit (and you damage your reputation which makes the next sale harder . . . and therefore more costly. A double whammy!).

3. Upsell and cross sell

A lot of the cost in any typical business is down to all the marketing and selling activity. The simple version of the story is that finding a new customer costs a lot of money and usually so does the effort involved to close each deal.  If you can persuade the customer to buy more of the things they need with each transaction your sales operation becomes more profitable. The classic example that is always given is the tin of shoe polish you are offered each time you buy a new pair of shoes.

4. Send the invoice and collect the cash

The last point requires no explanation – just sound business practice. Even so, it is surprising how often credit control is most commonly the function that nobody considers to be their job.

Do you need help increasing business profitability?

These ideas for increasing business profitability have two important things in common. Firstly, it is usually far easier to identify the problem from outside and secondly fixing the problem will usually require a change of behaviour. Two very good reasons to work with a mentor you can trust.

Webinar – How to help new staff become productive sooner

Staff Induction & On Boarding Webinar

Date: Wednesday 17th May 2017, 12.30-13.10

Are you busy recruiting new staff into your growing business?

If you are thinking of recruiting new staff or have experienced challenges when introducing a new team player, this FREE webinar will help you to take control.

The informative webinar will include examples of best practice with explaining how these ideas can be adopted to help reduced risks and improve performance.

Helping these new staff members to settle into their new environment as quickly, and easily as possible has multiple benefits for yourself as the employer and your new employee.

Register today to help you through this potential disruptive and stressful period.

CLICK HERE TO REGISTER


Who should attend

  • Business owners or senior managers
  • Business owners who operate a business with £500k turnover upwards
  • Business owners who are considering or engaged on a growth strategy

Businesses with multiple owners are all welcome to register. The webinar is totally confidential, your name or company will not be disclosed to other attendees.


Key Takeaways

  • Why recruiting can be challenging for small business owners
  • Common problems that go wrong in the first few weeks or months
  • Best practice suggestions to reduce risks and improve performance
  • Thoughts on the bigger picture topics such as culture and agility – how this activity helps to deliver business growth

This will be a practical session offering real-world examples and sensible, pragmatic advice. You will be able to ask questions throughout the session.


Speakers

Bob Brown from CMC Partners can draw on over 40 years’ of business experience in a wide variety of management and leadership roles. Bob has previously founded, operated and grown his own business with more recently, a very successful career at CMC Partners helping owners to realise their own business growth ambitions.


How to Book

CLICK HERE TO REGISTER

To view the webinar on the day, you just access through your normal web browser, you’ll hear the presenters and be able to see the relevant slides.

Can’t attend the live event? Register anyway and we’ll send you a link to the webinar recording for you to view at your leisure.

Taking Control of your Future with an Effective Exit Strategy

If you’re like the most business owners, your business plays a major part in your retirement plans – even Warren Buffet & Bill Gates agree to this!  Unlike these 2 gentlemen you may not have had the opportunity to fund your retirement beside from your home and your business.  OK your plan might be that you will just sell your business and retire on the proceeds, as an exit strategy this is very common.

But what if you cannot sell your business at the time you need to – your retirement plan could collapse!   There are several issues that you need to address with your exit plan if you plan to sell your business and retire with sufficient funds.

Do you have something worth selling?

Many successful businesses rely on one person, i.e. their success is based on the creations, ideas, energy and charisma of one individual.  When he or she goes, so does the business.

Some businesses have been very profitable the past but have been superseded by new technologies and competitors. Video stores, for instance, are now in their sunset years and record stores are obsolete.

Do you actually have a business that someone else is going to want to buy, or will someone else be able to profit from this business in years to come?

Be realistic about your small business’s worth.

What is your small business actually worth – maybe not what you think it is?

What someone is willing to pay for your business may not be as much as what you want to get for it. Small businesses are like houses; they’re both only worth what someone is willing to pay for them, and no more!   What you will get on the open market at the time you want to sell them may not be what you hope they’re worth.

If you don’t know what your small business is worth right now, you need to find out!  We don’t all get to pick our retirement dates, instead a sudden illness or unexpected event can change everything and force us to retire before we plan.

Start preparing to sell now.

If you had to sell your business immediately would you be able to? More importantly would it be in good shape to get the best price or even be attractive to potential buyers?

Ideally, you would like to have at least 3 years of good financial performance and sell when your business has still some growth left in the engine.  You also need to tidy up your balance sheet, which could mean moving around certain assets or removing bad debt.

Create an exit plan to ease the transition.

3 years of solid financials is a great goal, but it’s just one thing that needs to be done to get your small business ready to sell.  Just painting the front of the house is not enough to make the sale.

As with any plan pull together all the necessary documentation you will be asked for, including business records, customer data, inventory – and everything needs to be tidied up and easily accessible.

Creating an Exit Planning Makes a Difference

Who wants to be the person who goes to sell their business and retire and then discovers that all they have to sell is some inventory and fixtures?  Drawing up an exit plan to sell now and doing what you need to do to make your business an attractive proposition will ensure you can sell when you want to or need to.

If you want some key advice on how to take control of your future with an effective Exit Strategy, or if anything in this blog rings bells or resonates with your own experience, feel free to make a comment below or call Phil on 07720 397040 or email him.

Hear what this client says about us. Client: Software company, DeltaXML

‘I would certainly recommend our local CMC Partner, Bob Brown. He’s certainly added an awful lot of value to our company. He has made my journey more pleasant because as CEO of a company trying to grow and first time doing this, it’s difficult as there’s many things you can do wrong. Bob has prevented me making a number of mistakes and has given timely advice. Robin La Fontaine, CEO of Delta XML

Business: Niche Software Company

Number of employees: 15 people

How CMC helped: 

  • Focused the growth strategy towards the owners eventual exit
  • Introduced more disciplined management produces including financials, sales/opportunities pipelines, monthly meetings
  • Helped to recruit more employees in the right departments
  • Provided reliable professional contacts and expertise when required

What would happen to your business if you were sick or worse? Contingency Planning White Paper

In the event of an owner’s illness or death

A business contingency plan is a set procedure to follow in case of any major event and is a precaution, set up before death or illness, to state who would be responsible for managing your business. If you do not already have a plan in place, you need to write it now, not in five years or when you become older. Download this real life example contingency plan to give you guidance on the important discussions to have with your family, professional advisers and your senior team. You need to plan – for your peace of mind.

This business contingency plan includes:

  • Introduction
  • The owners incapacity
  • Family
  • Insurance
  • The Business management team
  • The role of CMC Partners
  • Long term steps
  • Actions arising

Download your copy of this ‘Business Contingency Plan White Paper’ Simply complete the form below and a copy will be emailed directly to you.

Family Success Planning: Win the Generation Game

There’s a lot of twaddle talked about the rise and fall of family businesses and family succession planning, like:

  • ‘Family-owned businesses are a small part the UK economy’.Actually they account for almost 95% of businesses in this country. So family succession planning is vital.
  • Family businesses ‘go from shirtsleeves to shirtsleeves in three generations.’(The first generation makes it, the second generation manages it and the third runs it aground).

The fact is that many family businesses fail because so few have a well-conceived family succession and leadership plans. It is believed sufficient for father to teach son the ropes and just assume that son will just carry on.

The reality is that family businesses are a vital part of the British economy, but their very smallness means that their needs tend to be overlooked by governments and by the family business owners themselves, who often do not provide an adequate family succession plan.

Consequently a number of mythical elements prevail. Here are just a couple:

  • Misconception: Family businesses tend to stay in the family.

Reality: Recent research suggests that just 55 percent of family business owners intend to pass their business to the next generation. This suggests that many family businesses will not be handed down in future and has major implications for planning a retirement sale. The underlying disruption and inefficiency that this causes within the British economy are incalculable.

  • Misconception: Going to work at your family’s business is like breaking the code of life. You get a cushy job and a fabulous inheritance when the previous generation dies or retires.

Reality: Only about six of 10 family businesses have sufficient resources to divide their assets fairly between all heirs. Furthermore, only a quarter of them foresee an ownership change in five years. And 40 per cent lack any kind of succession plan

When a company is turned over willy-nilly to “the kids”, that is where problems abound. What’s missing is a leadership plan initiated by the current family owners, yet the next generation is blamed for the failure.

Leadership Plans – the essential family succession planning ingredients

Competency – comes from developing the right experience and background to work in the company. Current business owners should be objective in matching future business requirements against the abilities of the next generation.

It may be a good idea for the designated successor to get outside experience in other (perhaps larger) firms, and/or to attend a reputable Management Training Centre from which a variety of short or longer courses are widely available. Alternatively, an experienced mentor (such as a CMC Partner) can do excellent work and facilitate on-the-job learning.

Commitment – Future success is unlikely if the next generation does not have the same belief in the founder’s business goals and philosophies. Sadly, many sons and daughters are drawn into the business through blind loyalty to their parents’ dreams and expectations, with little thought for their own aims and aspirations.

Character – is the most critical aspect of leadership. It arises from individual personality, and a vast reservoir of information, experiences and interactions. Business owners should assess the character and leadership qualities of their offspring before saddling them with a level of responsibility that calls for motivational as well as strategic and operational flair.

The more someone is aware of his/her personal and professional demeanour, the more successful will he/she be as a leader. This will almost certainly require the help and guidance of their forbears or someone like the aforementioned CMC mentor.

So we should set aside all the myths surrounding the success or failure of family businesses. Put simply, the next generation can lead family-owned businesses to greater success when the preceding generation provides the right preparatory support and commitment. In this, they may learn from the well-honed business and human resource practices of non-family businesses.

CMC Partners are well-placed to support smaller businesses that may lack the necessary internal resource for effective family succession planning and advise on whether or not a straight business sale might be preferable to a family handover.