by Russell Cummings | Nov 26, 2012 | Business Tips, Finance, Leadership, Marketing, People, Planning, Process Improvement, Sales, Strategy, Technology
The flipside of “success” is “failure” and it’s the latter that every business owner and manager strive hard to avoid. By definition, the term “business failure” refers to the cessation of a company’s operations following its inability to generate enough revenue to cover expenses without adequate reserves.
In the recent times, there are many examples of strong businesses that have failed to adjust to the changing markets and economic times or to take advantage of opportunities – and this has ultimately led to their downfall.
Based on my 26 years experience working closely with business owners, here are my 9 key tips to avoiding business failure:
1. always ensure that you target your marketing.
Too many businesses have an undifferentiated product/service offering and fail to understand who their target customer is and what they require. Don’t be undifferentiated, make sure you’re speaking the right language and using the right channels and/or media in targeting your main group of consumers. Focus on delivering exceptional value. ACTION: Develop a structured Marketing Plan for your business and revise it regularly.
2. always plan ahead.
Talk about what you want to do next and where you’d want your business to go by preparing strategies that will help you focus on your business goals and objectives and to make sure that appropriate and sufficient resources are in place. Be rigorous in your planning and hold yourself and your Team accountable. ACTION: Develop a 5-year Strategic Plan supported by Annual Plans. Have 90 Days Actions. Cascade your plans so that everyone in your business is part of a plan.
3. have great business models.
It is a fact that most businesses fail because of poor business models – a business model describes you will engage your target market to profitably generate revenue. To avoid this, make sure that you have great and well-thought pricing models and economic cost models that will help your business focus more on creating, delivering and capturing value needed by your customers. ACTION: Understand your Business Model – there are some great tools to do this.
4. have effective processes.
All businesses are driven by processes. However, few businesses have well documented processes. Many businesses fail to have any continuous improvement processes and have a well entrenched view that they are already efficient. The reality is far from this and many businesses can improve productivity by up to 30%. The challenge is to avoid waste in: time, resources, opportunities, materials, etc. caused by inefficiency – this results in higher than necessary costs and lower margins. ACTION: Apply simple Process Improvement Tools, like 7 Wastes to your business on a regular basis. Never stop searching for improvement.
5. engage your team.
As a leader, you should be a good example to your team. Teach them how to own issues, take responsibility, be accountable and model proper engagement, not only with their customers and clients, but also with each other. An effective team will overcome most business obstacles and enable your business to seize opportunity, when required. ACTION: Engage your Team by improving communication and feedback.
6. have great sales processes.
Sales is the engine that drives your business. Most businesses that fail do not have effective sales processes in place. So with that said, make sure you have great processes that your salespeople can follow. ACTION: Clearly define your Sales Pipeline and develop a Sales Model that delivers.
7. ensure you have adequate cash buffers.
“Cash is fact – Profit is opinion!” This great quote from Andrew Russo (Master Accountant) gets straight to the heart of the matter. Ensure you build adequate cash reserves in your business to ride out changing markets and economic conditions. Cash reserves also allow you fantastic flexibility when looking at opportunities. ACTION: Develop a plan for how you can build cash reserves in your business. Engage your Coach or Accountant in this process.
8. avoide uncontrolled growth.
Uncontrolled growth is often a pre-cursor to business failure. When business growth is “out of control” often cash flow is uncontrolled. Rising sales are barely enough to cover rising costs and cash is at a premium. Cash flow, staff, customers and production are all stretched often to breaking point. Avoid this by “taking your foot off the accelerator” – be more discerning in taking on clients – engage strategies that will slow demand (like lift your prices) – say “No” to opportunities that aren’t in your sweetspot – and introduce tighter financial controls and KPI’s. ACTION: Monitor key drivers in your business and ensure that you have the capability to meet demand. Develop strategies to maintain control.
9. take early action.
Too many businesses fail to “take effective action” until it is too late. Act early and avoid the Receivers! Set up effective monitoring systems. Plan for different scenarios (revenue, cost. Market conditions, competition, etc) and define “trigger points” – bank balance, sales$, profit %, market KPIs, etc – that will cause you to evaluate your options well in advance. These options should include plans for how you will address the challenge – reduce staff numbers, cut costs, close non-performing divisions/products, etc. Make these decisions now rather than trying to make them when under pressure. aCTION: Develop plans to address particular scenarios with effective trigger points.
Focus on ensuring that you have all 9 elements covered and you will do more than stave off failure you will be on the road to success.
What is the element that has the highest priority for you? Pick one and start working on it now.
Good luck!
Russell
by Russell Cummings | Aug 8, 2010 | Business Tips, Finance, Marketing, Planning, Strategy
NEAT Analysis
We have developed a simple methodology for looking at our marketing and business development options and have called it NEAT, which stands for:
- Number of Customers
- Efficiency %
- Average Sale $
- Transaction frequency
Now, N x E x A x T = Profit
You can look at NEAT from a whole business perspective or on a business unit basis, if required. It is usually done on an annual basis.
Number of Customers simply stands for the number of Active Customers in your business. In most businesses active customers will be those that have purchased off you in the last year or two. In high turnover businesses , eg. NewsAgents, active customers could be those that have purchased off you in the last 3 months. In the building industry, it could be people that have purchased off you in the last 5 to 10 years.
In any case, count or estimate the number of active customers in your business. You can usually get this information from your bookkeeping systems although in a retail environment this maybe difficult, so estimate the number.
Efficiency is usually measured as Net Profit/Sales and expressed as a percentage. For example: if you make $100,000 Net profit on $500,000 worth of sales then your E is 20%.
Average Sale. This is an important measure because it looks at the average $ spend per sale. To determine what this is, look to your records eg. bookkeeping systems or cash registers. From a bookkeeping system, simply divide the Total Sales by the number of Invoices and cash sales. From your cash register, record the total sales $ for a period and count up the number of actual sales in the same period and divide. So how much are your customers currently spending each time they do business with you?
Transaction Frequency. Quite simply, how many times do your customers buy from you in a year? To work this out divide the number of invoices or sales calculated above by the number of active Customers. If you are in a high frequency business, this could be a number between 50 and 100 (once or twice a week) or a low frequency business eg. building this transaction figure could be 0.1 (once every 10 years).
Working out the NEAT Values for your Business
As mentioned above, multiplying your NEAT components together should give you a measure of your profit. If we break down the basic components we can see the components of sales and efficiency.
N x E x A x T = Profit
(N x A x T) x E% = Profit
Sales x Efficiency% = Profit
( Customers x Sales x Transactions) x Efficiency % = Profit ( 1 Transaction Customers )
Now, complete the calculation using the figures for your business: For example: if we have: 200 customers, sales of $1,000,000pa.; Net Profit Margin of 15% of sales; 5,000 invoices (transactions) per annum, then your NEAT calculation would look as follows:
N = 200 Active Customers
A = Average Sale
= Sales/Transactions = 1,000,000/5,000 = $200/ Sale
T = Transaction Frequency = Transactions/Customers
= 5,000/200 = 25 per Customer per annum
E % = Efficiency % = 15%
Check that: N x A x T = Total Sales (200 x $200 x 25 = $1,000,000)
Check that: Sales x E% = Profit ($1,000,000 x 15% = $150,000)
This is all very interesting but how do I use it?
Once you have your NEAT components, you can start to analyse your business. There are 6 easy steps:
Step #1: Start with N (Customers). How many active Customers do we have? What proportion of our total customer list are active? For example: if we have 1,000 Customers on file over the last 10 years, but only 200 are active then only 20% of our Customers are active. How can we rejuvenate the 80%? How can we attract more Customers? How do we stop the “churn” in Customers? How many of our active customers are “A Class” customers? How many are “C Class”? How will you find more A Class? Brainstorm your actions and look at the impact you could have on N. Write down the new N number.
Step #2: Improve Efficiency %. Efficiency % is calculated by profit over sales. The difference between sales and profit is composed of costs. What can we do to reduce our costs? How can we become more efficient? How can we reduce our Variable Costs? What can we do about overheads and finance costs? How does your business compare with other businesses in the same industry? Brainstorm your options and calculate the impact these will have on your efficiency %. Write this number down.
Step #3: Increase Average Sale. Look at your average sale. How does this compare with what you thought your average sale was? Most businesses over-estimate their average sale figure. How can we improve this figure? Look at adjusting your pricing? What would have to change about your goods and services for you to command a higher price? How can you package products and services to add value? How can you up-sell to better quality, higher margin goods? Can you cross-sell and introduce additional items with the sale (eg. “Do you want fries with your order?”)? Brainstorm your options and estimate your new average sale figure. Write this down.
Step #4: Increase your Transaction Frequency. How can you increase the number of times your customers will buy from you in a given period? How can you bring them back to your business on a more frequent basis? How can you keep in contact with your clients? Do you have a contact program? Why not – it is the most effective way to ensure that you are in contact with your customer base? Do you collect contact details? Do you have a loyalty program? Again, write down your options and estimate the impact on the number of transactions.
Step #5: Calculate your new NEAT. Simply multiply your new N x E x A x T to get an estimate of your potential new profit. How does it compare to your current profit levels? Is it worth an investment of time and resources to grow to this level?
Step #6: Prioritise and Action Plan. Given that most business have limited resources of capital and labour, you won’t be able to do everything on your NEAT lists. What are the 3 most important things that you need to do based on the NEAT Analysis? Select the 3 that will have the biggest impact and develop action plans to implement the solutions.
Next Steps
Do the NEAT Analysis This is simple to do. Even if you don’t have accurate figures use the NEAT concept as a basis for improving your figures.
Develop a Contact Program for your Customers and prospects as a matter of priority. This is an essential tool for any business and usually has a very quick payback period and develops long term relationships with your customers.
Contact your MindShop facilitator if you need to ask any questions or need some assistance in developing a NEAT view of your business.