Make sure that your margins make sense. Giving away your product or service will never result in a profitable operation. It might work as a short-term start-up strategy, but it won’t keep you running long-term.
I am by no means a financial expert. Let’s just get that out of the way. What I can tell you is that making sales is not the same as making profit. I’ve spent years and many businesses trying to persuade myself that I had a viable business when I wasn’t paying myself a salary or I was working out of my mom’s dining room.
The very subtle and often misunderstood difference between three key terms can quite literally sink your business. You think you’re making money but you’re spending it as quickly as it’s coming in and your business model is broken.
The simple thought that should be in your head is that you should be selling something for more than you purchased it. So much more that if you sell enough of this product you’ll actually make a tidy profit after all of your expenses.
The very first and most important thing that any business needs once there is a product, is sales.
It’s pretty important to understand that if you aren’t making sales, your business isn’t going to be profitable, ever. Sales lead to income and hopefully income leads to profit.
When I started out in business I thought the equations were simple. I made a sale, I did the work, I was paid for the work and then I had money in the bank. In an ideal world, this is exactly how it should be. But it’s not that way at all.
Your sales equate to your turnover. Turnover is the money that came into your business through sales, as is, no strings attached. If you sell something for R200 then your turnover is R200. Simple.
Making and spending money
Things get a bit tricky when you talk about gross profit. Everything that is sold — time, products, anything — has a cost. If you buy a product at wholesale for R100 and sell it for R200, your turnover is R200 but your gross profit is R100.
Your cost of goods sold (COGS) or cost of sale (COS) are the two figures you use to calculate your gross profit. Turnover minus COGS/COS equals gross profit.
Gross profit is a dangerous term because it can mislead entrepreneurs. You think that the word profit in there is meaningful but it isn’t yet. It’s just a reflection that the product you make, buy or sell is actually being sold for more than you purchased it. This is a decent start but still not the whole picture.
This is the Holy Grail. Net profit is the one that matters. It is using all of your expenses. This is the figure you are left with once you minus all of your expenses. Your bandwidth costs at the office, your rent and everything inbetween. If you are making a gross profit of R100 at the end of the month and all of your expenses equate to R50 then you are left with a net profit of R50.
It’s important to take all of your expenses into account for net profit. You cannot be a profitable business if you aren’t paying yourself a salary, or accounting for rent. You get the picture.
Why this all matters?
You’re a start-up and you are making a huge amount of sales each month. Your bank account looks and feels full. The money keeps flowing in but you don’t notice that the money is flowing out just as quickly.
Your cash flow is killing you and you aren’t focused on it. You’re focused on top line revenue, your turnover, when you should be looking at the bottom line, your net profit. That’s the line that keeps your business in business. If the money is leaving your account faster than it’s coming into your account you are burning cash.
Related: How Smart Managers Drive Profits
If your cash burn exceeds the amount of money in your bank account, you are technically out of business. That’s why this terminology matters. They aren’t just words, turnover, gross profit and net profit can keep you alive or quickly destroy your company.
How To Increase Profits By Focusing On The Needs Of Customers
How a water softener company boosted sales with moves as simple as changing its ecommerce platform and hiring an AdWords advisor.
“Growing a small business is hard. If it were easy, everyone would have a business,” says Tom Tarasiuk, who knows first-hand the difficulties that small businesses go through when they try to succeed at online marketing.
As president and owner of Discount Water Softeners, Tarasiuk has helped his company streamline its efforts to provide an outstanding user experience and increase sales. This undeviating focus on the customer and a willingness to take risks have enabled the business to grow.
Here are those all-important strategies he’s used:
Customer-centric product development
Tarasiuk says that a key tactic in his company’s growth has been the work by leadership to keep overhead costs low. One way that’s been done is by eliminating the usual middle men and purchasing water systems directly from the manufacturer.
But even more important has been the company’s customer-focused philosophy. The company keeps its overall inventory minimal and develops products and features that will meet the needs of its clients. It’s done this by avoiding stocking merchandise that won’t sell because people don’t need it.
As Tarasiuk told me: “Happy customers are a critical part of our growth. We base our additional or new products on what customers are requesting or what areas of the market need a void filled.”
Improving the user experience
The company’s emphasis on the customer plays out in its online marketing strategy. Case in point is when managers decided in 2013 to switch ecommerce platforms. They had been using Volusion and transitioned to Magento.
Tarasiuk says they wanted a framework that would allow them to customize various types of content (images, videos, etc.) on any of their pages. Their goal was to improve the user experience and increase conversions. They did have some concerns about the switch, he says. They feared Magento would be less user-friendly on the back end. But without taking risks, an organisation cannot grow. The result? After changing to Magento, the company’s sales nearly doubled.
And it saw its organic SEO increase noticeably with almost no additional effort. At that time, the company completely redesigned its website. Again, prioritising the customer was key. The location of optional items and upgrades on the site was improved, for instance.
This allowed customers, Tarasiuk says, to “customise their orders and learn what upgrades would benefit them the most for their needs.” The site redesign, he says, increased company sales by as much as 15 percent.
Saving time with email
Another major part of refining the user experience and cutting costs at Discount Water Softeners entailed enabling customers to resolve some of their issues through email instead of over the phone. At one point, customer service reps were taking 45 minutes to handle each call that came through. Tarasiuk says he didn’t have enough employees to handle the volume of the calls. And hiring more workers would mean increasing overhead costs.
Instead, he solved the problem by allowing people to ask their most common questions through email. Through Magento, the company added PHP forms for people to fill out and used Crazy Egg to determine the best places on the site to put the forms. The company also increased sales by driving traffic to the forms by using Google AdWords. This solution cut, by 30 minutes, the time that its reps spent on each call, Tarasiuk says. It allowed the reps to handle a higher volume of calls without adding more employees.
Google AdWords has been crucial to growth.
Google AdWords has been crucial to the growth of Discount Water Softeners. In fact, Tarasiuk goes so so far as to call AdWords “essential to efficient performance and high ROI for sales.” He says he believes every company should have someone who is skilled at leveraging AdWords to its full potential.
Tarasiuk’s business has been using Google AdWords for over 10 years, and he describes learning how to leverage this tool as “pivotal in our growth.”
When the company first started using AdWords, it wasn’t selling much and was spending only $20 per day on the tool. But then Tarasiuk found Gail Gardner, an AdWords advisor teaching pay per click strategies at the now-defunct SearchEngineForums, and the situation changed. The advisor told him that if he wanted his company to be “discovered,” he should be spending at least $70 to $80 on AdWords per day.
Following that advice, Tarsiuk says, has revolutionized his company’s online presence and has been a decision he’s never regretted. At one point, when Gardner changed her work and switched to managing PPC accounts, the company had to go without an advisor for a period and instead rely on Google support. That situation wasn’t ideal because it wasn’t clear whether Google was prioritising the company’s campaigns or focusing on its own interests, Tarasiuk says.
Google did help keep Discount Water Softeners going, but it also didn’t see a marked improvement in its campaigns at the time. The assistance of an advisor was what really made a difference in itsprofits. So Tarasiuk contacted Gardner and asked for a recommendation for a new AdWords manager.
“That original AdWords advisor was essential at not only jump-starting our internet presence, [but] she showed us how to use and manage AdWords,” he says.
While there is no formula for growing a business successfully, there are principles that can guide you along that way. Take smart risks, and make your decisions based on what will help your customers. Because of the time and money Discount Water Softeners saved on strategies it adopted, it has been able to use the extra resources it gained to launch a new line of high-efficiency water softeners.
The company has also been able to diversify its merchandise, improve its product and benefit the environment, Tarasiuk says.
“You miss 100 percent of the shots you do not take,” he says, quoting hockey star Wayne Gretzky.
This doesn’t mean you should be reckless. It means to get good advice, and then take a leap of faith based on that information. If you don’t, you’ll never know what you could be missing.
This article was originally posted here on Entrepreneur.com.
Why Mitigating Your Risk Can Drive Up Your Fleets Profits
Business naturally comes with risk. How you mitigate that risk could mean the difference between a sustainable, profitable enterprise and a business surviving on the edge. Here’s how fleet management companies handle their risk.
“Whether your fleet consists of ten vehicles or 1 000 plus, it always boils down to the cost of maintenance, fuel and cost-efficient routes,” said Dr David Molapo, head of fleet management, vehicle and asset finance at Standard Bank, at a round table event hosted by Standard Bank to determine key impacts on profitability and growth in the fleet management industry.
To keep costs down and profits up, focus on:
- Mitigating fuel costs for business growth
- Implementing tools and telematics to save on transport and fleet spend
- Training and monitoring drivers to ensure driver and load safety
- Mitigating risks such as hijacking, driver behaviour and delivery delays
- Bringing services in-house
- Complying with legislation.
Attracting and training quality drivers
Attracting quality drivers is one of the industry’s main challenges. Businesses often have to recruit drivers and upskill them to become quality, reliable drivers.
“SAB has a programme where a driver will be sourced and run on a SAB truck for a year to 18 months,” says Con Conradie, country commodity manager: Fleet for SABMiller.
“He is assessed over a long period and once he meets the grade he can buy his own truck and receive a ten year contract.”
“We place our drivers on advanced driving courses and all our drivers are allocated to a specific vehicle, which has reduced our insurance costs,” says Dorin Charalambous, MD of DSC Transport.
Preparing for the risks
“We have branded our reps’ vehicles with a full body wrap,” says CEO of Nature’s Choice, Greshan Mandy. “Since then we have not had a single case of theft. It’s advertising for your business as well as an immediate deterrent.”
“We contracted with Driver Check to monitor our fleet and their behaviour on the road,” says Mandy.
“We also have cameras in the vehicle to watch the vehicle and the driver,” he adds.
“These can deter the drivers from driving recklessly. If your driver has not done anything wrong the camera can prove his innocence,” says Reinard Basson, financial manager for Shoprite Group Transrite National.
Delays in delivery
“A truck is scheduled to do a certain route and that whole route has been timed, from the moment it leaves the depot, when it stops at an outlet and the time it takes to offload,” says Conradie. “Each vehicle has a slot at the outlets and the vehicles have mechanised forklifts. We levelled the pavements and widened the doors at our outlets so that there would be no delays,” says Conradie.
“Sometimes we deliver palletised goods and the next day it is a delivery of cement bags. Often there is no one to assist with the offload, which results in delays while you wait for assistance,” says Hennie Engelbrecht, director of Kopano Fuel.
The need for specialist services
Transporting for niche industries is in demand, with specialist transport services required for niche products.
“Cost is important to us but delivering the product the way we want it delivered is also key,” says Carel Ganger, financial director for Ceva Animal Health. “We’re transporting a high value product and there’s a need in the transport industry to do something specific for cold chain.”
Bringing services in-house
“We used to use sub-contractors to get our product to the market as quickly as possible. Courier costs were becoming exorbitant and we were being impacted by the labour strikes in the transport industry,” says Mandy.
“We made a decision to bring transport in-house and we are now saving around R300 000 per month.”
Complying with legislation
“Our legislation and regulations are changing and many municipalities across the country are taking pride in maintaining their road infrastructures and ensuring that vehicles carrying abnormal loads have the right permits in place. This is beneficial to the industry,” says CEO of Matalana Transport, Comfort Padi.
“Customers are also ensuring that suppliers become compliant with the current legislations, such as ensuring that transport suppliers are ISO 9001 accredited and compliant.”
How To Maximise Real Returns For Your Shareholders
When you are both a shareholder and a manager of a company, it is all too easy to forget that, as a director, you have a responsibility to deliver returns and create value for your shareholders.
When you sit as a director on the board, you have to apply your mind to how the board and the wider team will deliver on the expectations that shareholders have or should have of the business.
There are many ways that directors can create tangible and meaningful value for shareholders and other stakeholders. Just having an effective governance process creates shareholder value. However, as a director here are some specific ways you can drive shareholder value creation.
Watch out for the illusion of success
When you are involved in day-to-day operations, it is so easy to fall into the trap of seeing all the good work that your team is doing as the reason to justify why shareholders are not getting the returns they should. In one of our companies, a shareholder once commented that ‘nothing seemed to be going on’.
I was initially taken aback and, as the excuse was about to pop out my mouth, I realised that he was right. If a shareholder does not get their return or some form of increase in value, then there is ‘nothing going on’ for them. When you wear your director hat in a boardroom, then understanding, agreeing and meeting shareholder expectations is a key area of focus.
Wear the ‘three hats’ well
As a shareholder-manager who also serves as a director on the board, you have to learn how to put aside your shareholder and manager hats and instead wear only your director hat. We have observed that the ability to wear the right ‘hat’ at the right time creates massive value for the board and the company as a whole.
Shareholder issues simply do not belong in the boardroom. They cloud effective decision-making and can, ultimately and ironically, destroy shareholder value even if the majority of those present are shareholders.
Independent directors are therefore pivotal in keeping everyone focused on just wearing the director hat well.
Turn risks into opportunities
Risk is inherent in every aspect of being in business. We cannot escape it, yet we can learn to mitigate the likely risks we face. Directors on a board should take this one step further – by finding ways of turning risks into opportunities. Perhaps a key risk for you is the availability of qualified and experienced employees.
A board might look at this risk and see the opportunity inherent in establishing a learning academy as a means of taking control over the quality and availability of critical human capital, which could even become an additional profit generating business in the short-term to medium-term.
Learn how to identify the right opportunities
Entrepreneurs tend to excel at drumming up new ideas and opportunities, yet they struggle to choose the right opportunities in the context of limited time and resources. The board of an SME or privately-held company adds value to shareholders by establishing a framework to separate the ‘wheat from the chaff’.
This accelerates the growth in value by choosing the right path at the right time and keeping the entrepreneur ‘on track’.
Never underestimate organisational culture
As Peter Drucker says, “Culture eats strategy for breakfast.” The best business model and strategy can all be for nought if the culture of the company is toxic or undermines the promise of the enterprise.
Directors on a board should never underestimate the importance of the collective values and behaviours of its team and how this directly enhances or destroys shareholder value.
Address the ‘elephant in the room’
And lastly, SMEs and privately-held companies are renowned for avoiding the tough conversations at a board or executive level, especially when there are personal relationships between shareholder-managers.
In wearing the director hat well, supported by candid independent directors, massive value can be quickly unlocked through decisively acting on the long-unaddressed issues that drain all the energy out of the team.
In short, directors have an absolute role in ensuring value creation for shareholders. However, this does not happen by accident, it happens by design. Have you designed your board to achieve this?
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