Make the right changes to your business right now by Luke Smith

Thursday 05 April 2018
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Make the right changes to your business right now.

It always surprises me how little time business owners spend on the improvements to their business.  I believe that the intention to do so is always there but when it really comes down to it customer and staff issues come first and things don’t change.  It’s not true to say there is not enough time.  We’ve all got the same amount of that – it’s a matter of priorities.  Developing your business must be yours.

To understand what you need to change there is amazing book called “The 5 most important questions you will ever ask about your organisation” which defines how to go about the strategy of the business and its implementation.  Drucker’s questions were:

What is our mission?

Who is our customer?

What does the customer value?

What are our results?

What is our plan?

For me, the most important question is the third one.  What does the customer value?  In fact Drucker says: “The purpose of a company is to create a customer…the only profit centre is the customer.”

It is often easy to lose sight of that when developing a business plan as it can be easy to fall into the trap of looking internally at what “we’re going to do” rather than focussing on the fact that at some point only one person (really) is going to make a decision to buy from you or not.

Running a small business is hard work and often requires the owner and the team to do long hours just to meet the existing customers’ requirements.  If it doesn’t then you’re overstaffed right?  

Every business is made up of numbers and just about everything in business that matters is a number – your sales, your margins, your customer base, your costs, your profit, your cash flow, your customer satisfaction score, your repeat business rate, your conversion ratio…the list goes on.

When business owners want to grow they usually focus on things like a new website or new or more advertising.  Whilst these are all perfectly valid ways to grow a business if you don’t understand the numbers behind these activities and the impact they have on your business model, the results can be poor and certainly writing them all down in a business plan is pointless. 

There are mathematical models which sit behind every business and when you understand the models you start to truly understand what drives your revenues and profits. 

Imagine a really simple business which has only 10 customers.  Each of those customers spends £10 each time they buy, and each of those customers buys from the business ten times each year. 

So, we have 3 turnover drivers here: 

The number of customers 

How much they spend on average each time; and 

How often they spend. 

When you multiply these 3 elements together you get total turnover.  So, for this business turnover would be 10 x 10 x 10 = £1,000. 

In other words, each customer spends £10 ten times a year, so they each spend £100 in a year. And if the business has 10 of those customers all spending £100 each year, total sales for the year become £1,000. 

If this was your business, you could undertake some sales and marketing activities to improve any of those numbers. Let’s imagine you are able to increase the number of customers by 10%. This means you will have 11 customers rather than 10, and total sales now become… 11 x 10 x 10 = £1,100. 

Increasing the number of customers by 10% increases sales by 10%.  Maybe you decide to focus instead on increasing how much they spend by 10%.  If you do this, your customers will spend £11 each time they buy rather than £10. Total sales now become… 10 x 11 x 10 = £1,100. 

In other words, increasing how much your customers spend by 10% increases sales by 10%. 

If instead you focus your efforts on getting your customers to increase how often they buy from you by 10% – so they buy 11 times a year rather than 10 – then again, your sales increase by 10%.  So, if you increase any turnover driver by 10% your total increases by 10%. 

So what happens if you increase all 3 of the sales drivers by 10% at the same time?  The answer is that turnover grows from £1,000 to £1,331, which is a 33.1% improvement and you may have expected it to only be 30%?  

What that shows is that you can take your existing business and focus on making minor changes to price, frequency of sale and volume of customers and drive dramatic change to your profitability.

Some other things you could do this year are things that lots of our clients did in the last one.  They’ve implemented cloud accounting and add-on systems reducing their costs and promoting visibility of their performance.  Some have developed better financial controls so no revenue is missed or cost paid twice.  Others have created excellent financial models enabling borrowing and better cash flow.

Those looking to sell have used a proven process to increase the disposal value of their business and restructured their investments to plan their tax better and a good number of them have incentivised their team members through win-win performance related pay and share schemes which motivate and reduce staff turnover.

Great businesses are taking action, getting support and growing.  You can get help with taking the action you need and get advice from advisors who have been there and done it.  2018 will go in a flash but it could be a great year if you prioritise what’s really important for the growth of the business and make that change.