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Increase Profitability

Focus on Top Clients

Increase your profitability by understanding that not all customers are created equal.

Steven Delport

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Do you treat all customers the same or do you treat them differently? Do you know which clients generate substantial sales and more importantly, which customers generate substantial profits and cash flow?

In order to determine the relative importance of your customers, rank each customer in terms of the following criteria:

  1. Sales
  2. Profitability
  3. Payment history.

1. Sales

How much and how regularly does the customer spend money with you? Is sales revenue stable, increasing or declining? What is the sales revenue per month over 12 months or more? To calculate sales revenue, first identify the products sold and then the number of units of a product sold x selling price per unit. Then deduct any discounts granted.

2. Profitability

Look at profitability by product purchased and then adjust or reduce for discounts, delivery and returns. When we talk about client profitability we are referring to gross profit. Gross profit is equal to sales less the cost of buying or manufacturing stock.

The calculation of the cost of sales for a wholesale or retail business is very different to that of a manufacturing business.

Wholesale or retail business

In the case of a wholesale or retail business, the actual cost of a product is the purchase price less any discounts received plus all costs incurred in getting the product to your warehouse or store (transport, insurance, import duty, equipment hired or purchased to unload, the cost of labour used to unload stock etc).

Manufacturing business

In the case of a manufacturing business, the calculation of the cost of sales is much more complex as one has to take into account direct material, direct labour and other manufacturing overheads.

  • Direct material forms part of the final manufactured product, eg. wood used in a table, and the quantity used varies with production volumes (you use twice as much wood for two tables as you would for one).
  • Direct labour is the labour physically applied to manufacturing the product.
  • Manufacturing overheads include all manufacturing costs except direct material and labour.
  • Indirect material does not form part of the final manufactured product eg cleaning materials or materials whose cost is so small that it’s not worth calculating eg cotton for sewing a suit
  • Indirect labour cannot be directly linked to the final product eg the factory supervisor or people who maintain and service the machinery
  • Factory rental
  • Rates and taxes
  • Water
  • Electricity
  • Insurance of the factory and stock
  • Leasing of machinery and equipment
  • Depreciation of machinery and equipment.

3. Payment history

How do the credit payment terms compare to other customers? Look at the frequency and ease with which you are paid for your products and services. If you are paid late and have to follow up frequently, this adds to your costs and should be used to adjust the customer profitability.

The key question here is: Are the credit terms reasonable for that customer and are you paid on time in terms of the agreed credit terms? You have already identified your key customers who generate the majority of your sales and profits. How many of these are your late or bad payers?

From your categorisation you now have customers that roughly fall into the following categories:

  • Premium
  • Intermediate
  • Marginal.

Is there over-reliance on any of your premium customers? Would the livelihood of your business be threatened if one of these customers closed down or moved their business elsewhere? If the answer is “Yes,” then you firstly need to ensure that these customers are exceptionally well looked after and secondly that you actively identify and target potential new premium customers so that your reliance on your current key customers is reduced.

Now assess those customers in the intermediate and marginal categories with a view to determining their potential future revenue and profit potential for your business. Do they buy exclusively from you or occasionally from you? Are their businesses well managed?

How many of the intermediate and especially marginal customers have substantial future revenue potential?

You should now have the following clients:

  1. Premium – in terms of existing revenue spend
  2. Intermediate – with good opportunity for future revenue and profit growth
  3. Intermediate – with little opportunity of future sales and profit growth
  4. Marginal – with good opportunity for future growth
  5. Marginal – with little opportunity for future growth.

In categories 1, 2 and 4 you need to ensure that the relationship and service levels are maintained or improved still further. You should develop the relationship at multiple levels with the customer.

In category 3 the relationship and service levels should be maintained or possibly reduced.

In category 5 you need to exit or improve profitability. Since sales volumes cannot be increased, then the way to increase profitability is to:

  1. Increase prices and/or reduce discounts
  2. Reassess the credit terms
  3. Strictly enforce payment terms
  4. Do not accept returns
  5. Establish a minimum value for goods to be delivered or charge for delivery
  6. Reduce the number of client calls made or limit customer contact to phone calls.

Steven Delport is the founder of Integer Consulting Solutions (Pty) Ltd. Integer Consulting Solutions helps: • Improve business performance and strategic direction, • Understand finance and business acumen, and • Develop individual’s knowledge of self. This three pronged approach helps improve profitability and cash flow while integrating strategy, operations and finance. Steven holds both a MBA and a Certificate Programme in Leadership Coaching from Wits Business School. He has extensive business experience having worked in the banking and consulting industries for more than 20 years and works with a number of business schools in the areas of strategy, finance, leadership development and coaching. For more information, please visit www.integerconsultingsolutions.com and find him on Google+.

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Increase Profitability

Growing Your Revenue In A Slow Economy

The dos and don’ts for your business.

Greg Morris

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The most dangerous counter to the unpredictability of any economic crisis is… doing nothing. The same everyday attitude can ruin any company. But what’s the next most dangerous behaviour? Clumsy or uncontrolled reactions.

What is needed, therefore, is finding and embracing the less common but noteworthy opportunities that unveil themselves during slow economic times.

You can do this in two stages.

  1. First: steady your company by sheltering it from associated dangers and make sure that it has the cash flow needed to stay afloat during the crisis.
  2. Only once you’re confident that you’ve adequately prepared for the worst, should you approach the second stage: looking for ways to grow your revenue over time.

Related: Why Bartering Can Be Your Untapped Revenue Source

An article by Gulati, Nohria & Wohlgezogen in Harvard Business Review (2010), indicates that, “…a subset that deploys a specific combination of defensive and offensive moves has the highest probability of breaking away from the pack. These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest comprehensively in the future by spending on marketing, R&D, and new assets. Their multipronged strategy…is the best antidote to a recession.”

Stage 1: Steady your company

In the first stage of stabilising your business in a recession (especially one that could continue to slide), take the time to methodically evaluate its weak points.

  1. Test out a few economic scenarios both at department level and across the broader business. Assess how each might impact your organisation, and cautiously calculate the financial effects. Then find ways to reduce your exposure. Make sure that you have sufficient cash flow and access to capital, to sustain your financial stability.
  2. Make a strong and targeted effort to lower expenses and boost efficiency. But, while it’s imperative to be fast, it’s also essential to have a rational, cautious, and well-thought-out plan. Don’t make radical cuts that will damage your business in the long term – by, for example, risking valuable future opportunities.
  3. Remember that cutting expenses boosts profits, but only if the sales price and the quantity of sales stay the same. If a reduction in expenses affects the quality of your products, you may need to consider lowering your price to maintain sales. This is critical as it can cancel out any potential returns and ultimately end in a loss.
  4. As your customers’ needs change, re-evaluate your pricing strategies and product mix. This may mean raising prices through effective branding, like Coca-Cola and Sony have done. These organisations have such strong brands that they can get away with charging higher prices than many of their competitors… all while growing their market share and preserving quality status, even during recessions.
  5. You can sell off non-core businesses and peripheral (or poorly performing) operations. Don’t hold out for ‘better times’ in the hope that you’ll secure the price you would’ve gotten when the economy was stronger. If the company isn’t essential to your goals and it increases your risks in the recession, sell it now.

Related: 5 Strategic Steps to Help You Double Your Revenue Next Year

Step 2: Prepare for the future

  1. A common challenge that many businesses encounter is inflexible or obsolete business models. Reconsider yours. Innovation in technology and media is constant, yielding a perpetually evolving business landscape. The traditional publishing industry is a perfect example of this.
  2. Do things differently and don’t be afraid to stand out by marketing your product in a novel way. Take Jordan’s Furniture: a US furniture outlet that sells more furniture per square foot than any of its competitors thanks to a strategy called “shoppertainment”.
  3. Consider pursuing transformative opportunities like mergers and acquisitions. If your business is relatively strong financially and strategically, a recession can be a rare opportunity to boost your competitive position. According to a Harvard Business Review article by Rigby and Harding (2009), “…companies that acquire in bad times as well as in good outperform boom-time buyers over the long run.”

Bottom line? Businesses that can find calculated and clever ways to balance lowering expenses to endure today and carefully planning and investing to grow tomorrow are most likely to survive and thrive after a period of economic recession.

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Increase Profitability

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.

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“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.”

Related: Small Changes that can Greatly Increase your Profits

Improving the user experience

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.

Related: 10 Ways You Should Invest Your Company’s First Profits

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.

Bottom line

Bottom line

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.

Related: Successful Entrepreneurs Limit The Downside To Maximise Profits In The Future

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.

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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.

Catherine Bristow

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“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.

Related: How TomTom Telematics Is Blurring The Lines Between Your Fleet And The Office

“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

risk-management-advice

Hijacking

“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.”

Driver behaviour

“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.

Related: How To Keep The Wheels Turning For Your Transport Business

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.”

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