Many business owners find themselves in a quandary on how to  generate additional sales, how to cut costs and increase their profit margins.  These situations may be the result of poor planning or no planning.  Deciding how to fix business problems could be a problem in itself.

Hiring a consultant to fix a particular area of the business without understanding how that area interconnects with the other areas could be disastrous in the long-term.  For  example, hiring someone to develop a marketing campaign without clarity on what  the return on investment should be and how it ties in with sales is common among small business owners.  They believe that fixing marketing will fix everything and there are marketing consultants who will work on fixing marketing with no concrete discussion on the expectation for sales.

Areas in business that interconnect include staffing issues and customer service, sales, marketing as well as cash management.  Consultants are “a dime a dozen” and many will focus myopically on their specialty without understanding how what they do will affect other areas of the business.  Some small business owners have paid for specific consulting services only to find themselves losing market share or experiencing decreases in profit margins in the long-term.  More than one area was affected and only one area was addressed; this will not solve the problem.

If one needs to close a serious wound, it makes more sense to use sutures than a couple of band aids. Temporary fixes just do not work and end up causing more damage as time goes on.  Do it right the first time and every time.

It is best to look at the entire operation and get some understanding on how each area interacts with the other areas so that it becomes clear how problems in a particular area will affect results in another area.  For example, if employees are not managed well, sales can be affected negatively, expenses can increase and this obviously leads to less profits.  Marketing strategies that are not properly implemented can also lead to less revenue.

When hiring a business consultant for whatever area of business, that consultant should have some clarity on other areas of business as well so that any advice given will benefit the business as a whole.  Working with business consultants who do not have, at minimum, a basic understanding of business financial statements can be problematic for the business owner.

Every decision a business owner makes affects the finances; therefore, business owners should become strategic thinkers and understand what they are doing, why, when, where and how.  They should have some understanding on what the expectations are for every decision and, if those expectations do not bring a return on investment, they may have to refrain from taking action and rethink the situation.  A good example is hiring employees.  Whatever the owner pays an employee is an investment in the business and that employee must perform to bring a return on that investment.  Owners must understand what the return on investment should be and how long it will take to realize the return.  This understanding could lead to better employee management, higher employee morale and more importantly, higher sales and better profit margins.

Owners should not habitually try quick fixes, though sometimes it is necessary to make a quick fix.  They must train themselves to take an in-depth look at the many situations that present and, thus make the best decisions to bring lasting prosperity to the entire operation.

With the economy facing recession and many people losing jobs and unable to find employment, it is no wonder that so many new businesses are being created. This is a wonderful phenomenon in itself, since the backbone of any economy is small business. However, according to the SBA and others who have studied the success of small businesses in the US for decades, approximately 90% of these businesses are destined for failure.

Anyone starting a small business must have some basic understanding of what it takes to operate a successful business and they must be willing to take action. In addition to having the necessary permits and licenses, registering with the city or state and getting appropriate identification numbers with the IRS, here are some steps that are necessary for any business:

1. Planning – every business owner should have a written plan. The start-up business owner must be able to address the next five years and plan accordingly. Businesses already operating have to always look back at prior behavior to understand what must be planned to ensure success in the months and years ahead. Business owners must always be fully aware of what they are be doing, why, when, how and who must be involved. A well-written plan is not about its length, but rather about the understanding of the interconnectivity of the various areas that are crucial to a well-run operation. These areas include marketing, sales, employees, production and financials. Whether or not the owner is seeking financing, a written plan is necessary. Of course, in today’s world, lenders and investors will not be convinced unless they can peruse a strong business plan.

2. Flexibility – business owners must be flexible. Everything changes yet everything remains the same. Businesses face the same problems that their predecessors faced and successors will face. These problems include financing, management, employees, competition and yes, technology. Technology is new today and can be obsolete tomorrow and businesses that want to compete must keep up. It could be as simple as replacing a cash register for one that improves the efficiency of operations. Business owners must be in a position to constantly measure their operations and be willing to make the appropriate, necessary changes to improve their profit margins. Being able to quickly recognize and address problems, being willing to change and adapt to situations, being able to take reasonable risk and being able to make informed decisions are crucial to the repertoire of talent business owners must possess.

3. Management skills – these are necessary and are so broad that most business owners will need help in this area. Managing a business includes every aspect of what the business needs in its efforts to become a profitable enterprise. The business owner must be willing to acknowledge his or her areas of weakness and must be willing to get help to fill those gaps. Failure to do so will almost certainly guarantee becoming part of the 90%-failure statistics. It makes sense for owners to do everything they are capable of doing to develop the business. Without help, there will most certainly be a time when the owner will become overwhelmed and not be able to function, either efficiently or effectively, to take that business to its pinnacle of success. So many businesses are barely breaking even and may not even realize this, unless it is too late, because the owners are so overwhelmed with marketing and sales, for example. Managing marketing, sales, employees and finances can prove to be too much for many owners. Marketing must be done regularly and consistently so that sales can be accomplished. This in itself is time-consuming and many times is neglected because the owner is busy focusing on other areas. Companies that succeed invariably employ people to fill positions that the owners once handled. Some of these companies grow to the place where these positions become departments with several employees working on a common purpose.

4. Employees – any business that intends to grow will need employees. Hiring and retaining employees can be complicated and overwhelming for business owners. There are myriad laws that govern labor in the United States and many mistakes are made when owners do what they believe makes sense to them or they continue behavior they learned from past experiences. One disgruntled employee has the power to take down a business, so owners must do whatever they can to stay compliant with labor laws; and these kick in when the first employee is hired. Proper planning is key to successful employee relations – when will employees be hired, will they be full-time or part-time, what and how will they be paid are some of the questions that must be answered in advance. Employee handbooks, job descriptions, application forms, reference checks, drug testing policies, offer letters, I-9 verifications, payroll, and proper file maintenance are some of the issues that are absolutely necessary for the average business owners who plan to hire employees. It is best to get professional help rather than make costly mistakes by failing to properly address these issues.

5. Financials – a basic understanding of financials is necessary for any business owner. It’s all about numbers since every decision a business owner makes affects the numbers. Many people want to start businesses but do not want to take the time to learn and understand the basics of their business financials. All the numbers tie in with each other beginning with the start-up costs. Owners must know how much funding is necessary to launch or expand the business and which part of that funding will be allocated to start-up expenses and which part will be allocated to start-up assets. They must also understand how many individuals make up potential customers so they can plan properly for marketing to that segment or segments. Next, how much will they be able to sell in the coming months and years have to be considered. This will be based on what is happening in their industry, what they can produce and also on what their competition is doing. Business owners must plan for profitability, so they must know when to expect profitability and what needs to be done to sustain the company until such time. It is also necessary to do a breakeven analysis using the sales, costs and expenses. Understanding the messages that are sent regularly from the Profit and Loss, Cash Flow and Balance Sheet financial statements are a must. Based on the business plan, these statements tell the business owners how strong or how weak the business is as well as what must be done for sustainability.

These five points are not everything there is to know about operating a successful business, there are so much more; but these are necessary basics. Business owners must be vigilant and be able to react quickly to circumstances that can lead to financial disasters. An in-depth understanding of the business’ strengths and weaknesses is necessary and must be analyzed constantly in conjunction with the opportunities and threats that present themselves. Failure to stay vigilant and failure to act quickly can be costly.

Fifty percent (50%) of small businesses fail within the first year because they fail to have a plan which they can implement to guide their operations. Many have never done a break even analysis and they continue to struggle, in many instances supporting the business from outside sources when the business should be supporting itself.

A break even analysis is essential to a successful business and will tell you exactly how much you must earn to pay all your expenses and leave your with zero profit. This is your starting point to making a profit. Let’s break this down.

The first step in breakeven is knowing all your expenses, direct costs and indirect costs. Direct costs are all those costs that are directly related to your sales; in other words, the cost of your sales or the cost of the products you sell. Your indirect costs are other costs that are not directly related to sales, for example, rent, insurance, salary, payroll taxes, and depreciation. Whether you have a sale or not, these are expenses that must be paid and are therefore indirect costs also known as fixed costs since they do not normally change from month to month.

Remember that your expenses include your salary. Some small business owners wait to see what is left at the end of the month after expenses are paid to take a salary. That is so wrong. If you want to develop a successful business, paying yourself a salary should be an integral part of your plan and the business has to develop sales to cover that cost. The profits of your business are not your salary.

If you make it a habit to take whatever is left from the business, you are not building a viable business, your cash flow will be negative, your income statement will show a net loss and your balance sheet will not show any growth in net worth for your business. Why be in business if your goal does not include growth? The very essence of being in business means consistent growth.

Once you are aware of all your expenses, i.e., every single item down to the paper clips and the coffee, you now know how much sales you must have in order to breakeven or have a zero profit.

Knowing your breakeven point helps you develop your sales strategy and your pricing point.

Look for these topics later on our blog.