‘How To’ Coaching series – Activity 35

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 35 – Inventories are monitored to ensure turnover with minimal financial outlay

Stock control, maybe not everyone’s favourite subject. You may see it as a necessary evil, but this is where money can be saved or lost.

Introduce a process, system into your business to monitor the turnover of your stock levels.

It is just as important to ensure you are not carrying too little stock as carrying too much.

One horror story that saw the demise of a large aircraft manufacturer comes to mind, from many years ago.  The company produced military aircraft.  A senior buyer thought it was a good idea to purchase the ejector seats as production began on a batch of aircraft. The initial financial savings appeared considerable.

Suffice to say, that was a bit simplistic. The ejector seat contains explosive devices to blow the seat out of the cockpit should the pilot decide it’s time to leave.  These explosives are ‘lifed’. That means they can only be considered operational for a specific period of time. Also, there is an ongoing program of refurbishment and maintenance on the seats. As the aircraft would not be ready to have the ejector seats fitted for some time, the seats would require 3 or so services prior to use; and then they would be almost ready for replacement. All this without even making it into the aircraft, let alone flying.

This, and a few more significant purchasing errors brought the business down. It closed the business and made a large number of people redundant.

I’ve seen this in an SMe too. A ‘lifed’ product was purchased in a quantity that would last for 5 years, at the current supply rate. Only problem was that it went out of life in 2 years. To compound that issue, the supplier decided to sell directly to the public, at a rate cheaper than the SMe had purchased the product for in the first place. I suggested that client cut their losses and sell them at a reduced price that would see them off the shelves quickly. They decided to wait! In just over 2 years they threw away the lot! A loss of over £180000. Ouch!

The HowTo bit:

Build a stock management process and system, preferably automated. Introduce min/max and/or JIT (just in time) levels of supply. Ensure you monitor any ‘lifed’ items and also anything that might be ‘fashion’ driven. This way you will have invested the minimum of your operational cash into the business and have stock as and when it’s required.

If you would like to find out more details and would like some help introducing the process, Contact Us

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‘How To’ Coaching series – Activity 34

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 34 – I have more than 5 Strategies in place to increase my margins

If having a strategy to increase your margins is a good way of raising your net profit, just imagine what more than 5 will do.

It is useful to develop a schedule for the development and implementation of your margin strategies.

Rather than make huge changes in one go, consider bring them in over a sensible timescale. That way you will see which ones work, and which are the best. You will see how well (or not) the changes you make impact the bottom line.

I shared 5 ideas in the ‘HowTo’ post number 33.  Those are a good place to start.

What other areas can you think of that would make your margin better?

The ‘HowTo’ bit:

Here’s one to think about; develop a greater awareness of your brand, increase the perceived value of your products/service…. ‘reassuringly expensive’ for Stella Artois comes to mind. How about improving the design & packaging of your product, and then raising the prices.

Another way is to offer a selection of offerings. Something like, basic, standard or deluxe for your service. The work you provide will be basically the same, with some additional low/non cost features. That way the customer can choose. If the customer is influenced by the extra value offer, they will usually choose the middle or upper level.

Having wondered about how to price a service, the client decided to offer a selection of 3 levels of service. These were very similar in cost to provide.  They had different price points; and, you’ve guessed it, nearly every customer chose the best – it’s all about perception.

So, with this in mind, build a list of margin increasing actions to put in place and work out a schedule to implement them.

If you would like to learn more about this process and how to implement your margin increasing program, Contact Us

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‘How To’ Coaching series – Activity 33

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 33 – I know how to increase my margins

What do you do to get better margins on your sales?  That’s if you know what your margins are…  I see it so often; business owners don’t know what their actual margins are.  I’m sure you’re not one of those, are you?

Just in case you are, here is a safe place to find out what you could do.

First you need to know your margins. That was covered in ‘HowTo’ post number 31. Here, we talk about knowing how to increase those margins.

Depending on the industry you are operating in, there are typically different margins.  Margins in manufacturing tend to be lower than margins found in a professional service, such as a legal company.

For example, a small increase in margin for company producing many thousands of components can lead to a big increase in overall profits.  Whereas a bigger percentage increase for a business providing a service to a small number of customers would be required to gain the increase in overall profitability.

There are many areas in a business that may benefit from improvement, below are some basic ideas for starters.

The ‘How to’ bit:

Here are 5 ideas…

  1. Reduce waste.  A manufacturing client introducing an automated system for getting the most out of their materials could see a 1% increase on the bottom line.
  2. Reduce unprofitable customers.  A service industry, with a small number of clients, would do better to focus their resources on clients who are easier to work with.
  3. Limit discounting.  By introducing a schedule of discounting, a store would give less away arbitrarily.
  4. Focus on profitable products/services.  Consider stopping selling a product that gives little or no return.
  5. Review suppliers. Introduce an annual review of the terms and agreements.  It may be that a supplier has keener pricing if you are purchasing more than you were previously.

If you would like to find out more ideas on how to increase your margins, Contact Us

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‘How To’ Coaching series – Activity 32

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 32 – I ensure that all products/services I sell make a Profit

Once you have put the financial measures in place for your offerings, you then need to determine that you ensure you DO make the profit targets you’ve set.

I’ve come across many instances where people are not necessarily that confident on their prices; and this often leads to giving it away.  Have you ever done that?  Have you told yourself that it’s ok?  When did the checkout person at a supermarket say ‘would you like that item cheaper’? No, of course not.  The price is the price.

The ‘How to’ bit:

Before marketing and selling your products/services, make sure you are comfortable with the price – understand the value! Do some research, if you have direct competition, see what the market is charging.  If you have a new category, charge what you like.  The market will tell you if you have it right.  Just think of the iPad.  When Apple launched it, many experts said it was doomed, a white elephant, and much criticism.  Well, now we know that it has been, and continues to be, a great success.  The cost was seen as prohibitive.  Now, it’s just the price you pay if you want it.

One good way to help maintain your price is to write it down.  One your website, a menu, a price list.  That way, you and your customer know the price.

It may be that you put offers together, such as bundles.  Though make sure that each component any deal still is making a profit.

Suffice to say, if you have products you are making a loss on, why are you selling them?

If you would like help with ensuring that all your offerings are making a profit, Contact Us

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‘How To’ Coaching series – Activity 31

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 31 – I know what Margin is and have set up Minimum Margin Goals

Before I started my own businesses, I used to think it meant, the bit on the side of the page where the teacher wrote remarks on my spelling or sums… turns out there’s a business meaning too.

In business terms, Margin, is the difference between the seller’s costs for acquiring the items and the selling price.

The term Margin has a slightly different meaning in financial accounting and investing. We will focus on the sales margin in commerce.

Although it will vary considerably by industry, a margin of 25% would usually be seen as a good amount, 10% average and 5% low. These numbers are just an indicator. You need to look at your industry for a more typical example of the expected margin percentages.

The ‘How to’ bit:

Divide gross profit by revenue. To make the margin a percentage, multiply the result by 100.  If your Margin is 25%, your business gets to keep 25% of the total revenue; Gross!

Set your minimum margin targets and record the actuals against the plan to see how well you are doing.  The resulting records, over time, will give you a trend of what is happening.  This can then be analyseddeeper to see why you hit, missed or exceeded target.

The actuals can drive your future pricing to make sure you are making a healthy gross profit. Remember, Margin, or Gross Margin as it is sometimes known, does not include the costs of overheads.

If you would like to find out how to work out and set your target margins,  Contact Us

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‘How To’ Coaching series – Activity 30

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 30 – I know what Markup is and target levels

I’ve often heard the term Markup being used, but when I asked people what it means, it seems it can mean different things.

Simply put the definition of Markup is, the difference between the selling price of your goods/services and the cost to provide them.  Markup is often expressed as a percentage over the cost. A Markup is added into the total cost incurred by the producer/supplier to provide the goods/services in order to cover the costs of doing business and create a profit.

This simplistic statement is ok, as far as it goes, but what are your costs?

It should be easy to know how much you sold somethings for.  What is, sometimes, not so easy to understand, is the costs you include for making the calculation.

to understand your Markup amount, take away the costs of goods/services sold (this gives you the Gross figure), and then take away a portion of your overheads (this gives you the net figure.

I have seen business owners who think they are making a great margin, with the Markup percentage then have chosen, who then find that the way they are accounting for their overheads makes it a much smaller profit; and in some cases, a loss.

When you understand what percentage profit (Gross or Net) you want to make, Markup allows the you to determine the amount of money that will be made from each unit of sale.

For example, if you sell a popular product you may want to target a total markup of x%.  But some of the items in the product are just general components that you wouldn’t necessarily put a markup on them.  It may be that a markup of x% across the who product might make it less competitive, hence you may choose to just cover the cost of purchase for some items.  So you need to understand how your markup breakdown.

By understanding your markup targets, you know if you have room to negotiate a deal. That might be a discount, I don’t like discounts, or a value add.  Say you sold water tanks, you might give a small sample bottle of cleaner as a value add and record it as a marketing cost.

The ‘How to’ bit:

If you wanted to add 20% markup on a sales item, multiply the original price by 0.2 to find the amount of a 20% Markup, or multiply it by 1.2 to find the total price (including markup).

To find your costs, add together all the costs for supplying an item and then add an amount for overheads.

Depending on your business, you will, need to define a way to apportion this in a way that can be associated with the unit of sale.  i.e. you might take the total cost of overheads and divide it by the number of items sold over a time period.  If overheads are £5000 for the month, and if you sell 800 items, of the same value, that would be an overhead cost of £6.25 per item.  It gets more complicated when you have multiple sales prices and costs.  If you do not have an electronic accounting system, such as Xero, a spreadsheet would be a good way to do the calculations too.

If you would like help setting up your Markup and targets, Contact Us

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TheEvolutionCBS How2 Workshops provide pragmatic advice and tangible “takeaways” for owner-managers looking to create significant growth in their business.  Our workshops are highly interactive and each attendee is encouraged to actively participate.

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