Companies often believe that they require a substantial range of products to compete, but more often than not they are better off with a smaller product range which will allow for increased business and sales focus and ultimately profitability.
In determining what products to sell, there are a number of questions to consider:
- What is the cost of manufacturing or purchasing a product?
- What is the gross profit of each product?
- How many of each product is being sold?
- How much effort (time) is required to sell a product?
- How should sales staff be incentivised?
What is the cost of manufacturing or purchasing a product?
The calculation of the cost of manufacturing or purchasing a product (the cost of sales) for a wholesale or retail business is very different to that of a manufacturing 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).
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. The calculation of the cost of sales will be covered in more detail in a future article.
Why is the manufacturing or purchasing cost important?
The cost of manufacturing or purchasing a product is key because once a products cost is known, then you can establish a selling price. Over or under pricing can also be avoided.
What is the gross profit of each product?
The gross profit of a product is essentially the selling price less the manufacturing or purchasing cost (cost of sales) of the product.
Why is gross profit per product important?
Frequently we hear that “the market determines the selling price” and often this is true, but it is essential that the product costs are such that you earn a gross profit on the product at the current market price. If you cannot earn a gross profit on a product then your options are:
- Differentiate the product so that it can be sold at a premium to the current market price,
- Reduce costs by improving business and manufacturing processes so that sufficient profit can be made on the product.
- Stop selling the product.
In your business would you buy a product for R100 and sell it for R50? No. Yet how many companies sell products for less than cost because they never knew what the product cost in the first place. If your revenues are increasing and your profits are declining then that new product you introduced that is selling like hot cakes is probably being sold for below cost.
You should almost never sell a product at below cost. The exception to this is the loss leader. Loss leaders are frequently used in retail. They are products sold at cost or below cost with the intention of attracting customers into the store to buy more profitable products. Examples include bread and milk. The loss leader is also often packaged together with another product, for example, companies who sell razor blades will provide the handle for free because they make their money selling the blades.
How many of each product is being sold?
Sales figures by product are important so that you know what is selling and what is not. However companies often focus exclusively on sales, while ignoring profits. Do so at your peril.
Knowing the gross profit for each product allows for a focused sales effort. A sales effort focused on the most profitable products as opposed to the most expensive products.
How much effort (time) is required to sell a product?
Another criteria to look at is the selling effort or time required to sell a product. The driver here is volume and products which require too much effort or time to sell and thus are sold in low volumes should have less effort spent on them or be discontinued. See Table 1 below where initially there is a sales revenue focus. Then look at Table 2 where the focus has shifted to a profit focus. The same amount of time is till spent selling, but the focus has changed from sales revenue to profit.
The exception to the above would be in a business where the sheer volume of product sold is what drives profitability. Here the volume of the lower profit products results in profits exceeding the profits of the higher margin products. A typical example of this is a retailer such as Pick n Pay where the products have low profit margins, but are sold in high volumes.
How should sales staff be incentivised?
Sales staff should not be incentivised on sales revenue, but rather on gross profit. This ensures that the most profitable products are sold and not the most expensive. The goals of the company and the sales people are thus aligned. In Table 1 above it is clear that the best product for the company to sell is B which at R 400 (50% of R 800) has the biggest gross profit and margin. However, if someone is incentivised based on sales revenue then they will focus on C which at R 120 (10% of R 1200) has the smallest gross profit and margin.
How To Immigrate With Your Family By Starting A Business In The UK
The simple way to make your entrepreneurial dreams come true in the UK.
Many people, especially those with families, are reluctant to up sticks and move to the UK. These would-be movers are often worried that they will not be able to secure employment in the hugely competitive UK job market. This source of stress alone is enough to discourage some from pursuing their dreams of living in the UK. But, there is an innovative and accessible solution.
The UK has several visa classes aimed at individuals who wish to invest in the country. These give an individual the right to live and work in the UK with their families, if they make a defined investment. A visa that interests South Africans is the Tier 1 (Entrepreneur) visa. We have developed our UK Tier 1 Entrepreneur Investment Programme to help South Africans looking to immigrate to the UK alone, or with their families.
The basics of the Tier 1 (Entrepreneur) visa
To be awarded a Tier 1 (Entrepreneur) visa, you will need to invest at least R3,5 million (£200,000) in an existing UK business or one you start up. There are certain other requirements, but these are not particularly onerous, and most investors will qualify if they submit their application correctly.
The entrepreneur visa allows you to live and work in the UK, and take dependant family members with you, defined as your partner and your child under 18. If you have the capital, or are willing to liquidate your assets in South Africa to raise it, the Tier 1 (Entrepreneur) visa is a great way to relocate your entire family to the UK.
Do note: You will need to make specific applications for each dependant, so it is vital you consult with an immigration expert before beginning the application process.
You’re not just immigrating, you’re investing in the UK
By starting or investing in a UK business as part of our programme, you will be granted the right to live and work in the UK, and earn an income from that business.
The business you invest in will want you to play an active role, not just contribute seed capital. If you want to invest in a business without being an active director you will be allowed to do so, but you may not be eligible for the Tier 1 (Entrepreneur) visa.
Another restriction is that you cannot hold this visa and work for a business other than the one you are invested in. But, your partner will be allowed to work in whatever field he or she pleases.
How do you choose the right business to invest in?
There is always an element of risk when investing in a foreign business, particularly when you’re thirteen thousand kilometres away from the country you’re investing in. It’s important to understand exactly what you’re investing in before you take the plunge.
That’s why our UK Tier 1 Entrepreneur Investment Programme is hugely beneficial. It matches your investment capital with a pre-approved investee business. We’ll make sure that your skills are matched with an appropriate venture so you can be an active director of that business.
We’ll also handle your visa applications, providing you with a comprehensive immigration and investment solution. Our partner’s list of investee businesses is over 200 strong, giving you an array of choices in various industries. This allows us to pair you with the business that best suits your investment goals and skills.
But what if you have a successful business in South Africa?
It’s no secret — emigrating from South Africa is difficult for many families who have deep roots and thriving operations. There’s no reason why you can’t keep your business in South Africa as well as relocate to the UK.
Nothing restricts a Tier 1 (Entrepreneur) visa holder from owning and overseeing businesses in other countries while they are on this visa. Many clients choose to relocate to the UK while ensuring that their original business continues to operate. In this way, you will be supplementing the income from your UK investment with revenue generated by your South African business.
You can hold British and South African passports if you apply for your British citizenship in the correct manner. You must obtain permission from Home Affairs in South Africa to avoid having your citizenship revoked. Retaining your South African citizenship will make it much easier for you to continue running a business here.
Talk to us today
There are compelling reasons to move to the UK — a brighter future for your children and a more stable country in which to retire. Our comprehensive solution will ensure you get the most out of your relocation.
If you’re thinking of immigrating to the UK or investing offshore — either or both — we can help.
8 Negotiating Tactics Every Successful Entrepreneur Has Mastered
How you would negotiate if you were talking for the other side? Now you know how your offer looks to them.
Deep down, we’re all a little greedy. We all want the best outcome for ourselves. We can’t help but consider what’s in our own self-interest any time we negotiate a deal.
But to become a truly successful negotiator, you have to learn to put aside pure self-centeredness. Because if all you care about is serving yourself, you’ll blow the deal before you even start.
Negotiations are a delicate balance of give and take. Learning to strike this balance is necessary for any entrepreneur hoping to build a prosperous business. It takes time and practice and whole lot of patience to hone a winning strategy. And yet each deal is unique and needs to be approached correctly, which is why a one-size-fits-all approach will never work for long.
Here are eight of the most important skills every entrepreneur should learn to become a master at negotiations.
1. Do your prep work
Successful negotiations are built on solid prep work. This means you know something about the parties involved, you’ve done a little background checking, you know about their business and maybe you’ve even talked to others they’ve worked with to get an idea of their strengths and weaknesses.
The same is true if you are on the other side of the table and are looking to invest in a product or service. You should have a solid understanding of the pros and cons of the commodity they are selling. The bottom line is, you need to have a good idea of who you are dealing with and what they can offer.
You should always go into negotiations with your best foot forward. You should be well rested. You should have eaten something (being “hangry” can swiftly detonate any negotiation). You should show up on time – maybe even early, so you aren’t walking in feeling rushed.
If you’ve done the above, you should be feeling positive and are going in clear-headed and confident. You will have the stamina and energy to get this deal done.
2. Consider all the details of the opening offer
The opening offer usually acts as an anchor for negotiations. It’s also where the details get hammered out, so it’s important that it’s done carefully and thoughtfully.
The basic elements of an offer include the offer price, the work being proposed, what goods or services are included, when it will all be delivered and if there are any performance incentives, warranties or terms and conditions. Obviously, price is a key component to any deal, but keep in mind the other details. They can matter nearly as much in the long run.
If you are the one initiating the opening offer, this is your chance to set the stage for the negotiations ahead and start with the upper hand. You won’t get what you don’t ask for, so be bold! If you’re on the other side of the table, the offer is key to seeing how close together you are.
Know your bottom line – what are you willing to accept? And remember to take a close look at the details. What else are you getting for your money and what else are you potentially signing up for?
3. Check your ego and emotions at the door
While you should have confidence and assurance because you’ve done your prep work, you also have to check your ego at the door.
Letting your emotions run the show will never serve you well. In fact, you should be going in feeling as neutral as you can about the situation. Leaving your ego behind will free you to think objectively during intense bargaining. You can then negotiate from a standpoint of flexibility.
To be successful you have to be able to think clearly in stressful situations and be willing to work to find common ground. If you walk in with a middle-of-the-road attitude, you’re more likely to strike a balance between getting what you want and not giving away too much.
On the other hand, you don’t want to give something away without getting something in return. Losing your ego and putting your emotions aside will help you find right path forward.
4. Play the game rather than letting the game play you
If you’re entering into high-stakes negotiations, it may be helpful to run through possible scenarios with a friend or colleague.
This will help you feel less nervous, and it may also show you objections to the offer that you hadn’t thought of, or help you see a side of the deal that you hadn’t considered.
Playing through the scenarios, even if it’s just in your own mind, may help you feel less attached to the outcome. In order to treat the whole thing as a game, you should care…but not too much!
Having a little apathy will help you stay neutral and keep your feelings in check. And remember, negotiations are like anything else: the more you practice, the better you’ll be.
5. See your strengths and weaknesses clearly
Self-awareness is key when you begin negotiations. You are essentially looking for the other side’s strengths and weaknesses. Not in a cruel way, but to help you determine your next play.
At the same time, you must also be aware of your own strengths and weaknesses, so you don’t allow yourself to be exploited. Try to take an honest inventory of your strong points and vulnerabilities.
If your company is small, what is its growth potential? Are you able to be more responsive to the market than a larger company? In short, what can you offer that the other side can’t, and what can the other side offer that you can’t compete with? Knowing where you stand on the negotiation chessboard will help you determine how to land the best deal.
6. Know when to walk away
When you enter into a negotiation with the knowledge that you are willing to walk away if things don’t go as planned, you come from a position of strength. That’s why staying neutral is key to a successful negotiation.
You can’t be bullied into a deal if you just leave. But often we tell ourselves that this deal means everything to us. Our ego is involved, and that weakens our position.
It’s about mindset. You have to believe that if this deal falls through, you aren’t losing an opportunity. You are keeping that space open so when a better opportunity comes along you can snag it. If you force a bad deal to happen, you are stuck.
Related: Let’s Make A Deal
You are no longer able to grab hold of something better. And there is no shortage of business out there. So if you are pinning all your hopes on one deal, you may be killing future business.
7. Negotiate in good faith
Whether you’re negotiating a long-term business deal or setting up a quick sale, it’s natural to feel on the defensive when you begin negotiations. We are all protective of our interests and we want to cut the best deal in our favor.
But if you are hoping to walk away with your reputation intact, you need to practice negotiating with compassion and good faith. Engage in active listening and really hear what the other side is saying and asking for. What are the issues that are making them hesitant? Then make sure that you relay your own priorities.
This is the basis of a “win-win” solution, when both sides explore each other’s positions and walk away feeling heard and comfortable with the deal that was struck. Even if it appears that you are on opposite sides, there’s usually common ground to be had. Maybe the other side has a different goal or an opposing position. But if you look for it, you can usually find mutual gains both sides will accept.
8. Know how to close
Negotiations may feel like a game of chance, but they’re more like a game of chess. A successful negotiation requires a good sense of timing and the ability to sense the other side’s next move.
If you’ve done your prep work and are bargaining in good faith, you should have a solid idea of what they’re looking to get out of the deal. And of course, you should have a clear idea of your own bottom line. So you’re either working to bring the sides progressively closer, or the deal is going nowhere.
Ask yourself what the endgame is. Can the difference between both parties be split? If both sides are close but a few numbers are hanging up the process, what will it take to shake things loose?
If you can strike a bargain that makes sense, it doesn’t need to be perfect. It just needs to work for both parties involved. If you can get to that point, you have set the stage for the final handshake. If not, you have to be willing to walk away knowing it just wasn’t the right time.
This article was originally posted here on Entrepreneur.com.
Peak Performance: How Do I Build A Culture Of Sustainable Growth?
A business cannot move forward and grow in a sustainable way unless the people move.
As a Peak Performance coach I have been involved in numerous transformation journeys, from facilitating the transformation of a toxic culture to one of positive and exponential growth, from assisting a person to move from a state of depression to a joyous and fulfilling life, and to see people move from poor performance to unleashing their true potential.
Two key learnings for me as a coach has been:
‘The company or business cannot move forward in a sustainable way unless the people move’
‘Most businesses are over managed which drains the teams’ energy and passion and under-led resulting in a lack of purpose and vision’
Thus ‘moving’ the people in your business and ensuring that there is a healthy balance between leadership and management are critical factors to build and maintain a sustainable culture of growth.
A business cannot move forward and grow in a sustainable way unless the people move
An uninspired workforce whom in general just view their jobs purely as a source of income can easily become ‘a slow poison’ that eventually causes the death of your venture as a business leader. Move and inspire your teams by instilling a sense of purpose and Vision. When the people within an organisation have found their purpose ( the very good and inspiring reason to do what they do) and that purpose aligns with what the company is aiming to achieve, they can work effectively without supervision and act in the best interest of the company at all times, even when no one is watching…
A shared value system that is not merely a philosophy but rather becomes visible action on a daily basis combined with strong commitment and tenacity in the face of challenges is a powerful tool that empowers your team to be a catalyst for sustainable growth and development of people and profits.
When the team co-creates a Vision that they are really inspired by and when this vision is underpinned by a shared and actionable value system that is not there for show but are guidelines within which every team member operates a nucleus of strong leaders will emerge that can help your business to grow exponentially.
It is a myth that you as a/the business owner can motivate others as internal motivation is a decision that falls upon each individual. It is however very possible to create an environment as a leader within which it is easier for others to motivate themselves. Partly this is done by constantly inspiring others by your example as a leader and by establishing a culture of constant learning within your business. If you are not learning you are stagnating and the undesirable next step after stagnation is inevitably to go backwards.
Peer management where all team members are held accountable can be an effective tool towards exponential and sustainable growth. Personally I am a big fan of ‘stand-ups’ which is an impactful and speedy version of traditional meetings. The length of a stand –up is determined beforehand, everyone is standing during the meeting to create a better chance at an energetic environment. Everyone is notified and given enough time to thoughtfully prepare for the next stand-up. During each stand-up all team members look each other straight in the eyes and hold each other accountable to living the Vision, purpose, and values of the company and very directly tell other team members what they expect and need from them in order to be more effective within their respective roles. Peer management is only effective within a culture of positive action and where excuses is viewed as an ill devised practise to engage in.
‘Most businesses are over managed which drains the teams’ energy and passion and under-led resulting in a lack of purpose and vision’
There is a vast difference between management and leadership that unfortunately is ignored by a large proportion of companies. Leadership is about inspiring people towards the co-creation of a desired future state.
Management is a day to day orientation where activities are closely monitored and measured. Both Leadership and management is sorely needed to be a sustainable success. However if the balance shifts dramatically in the favour of management at the expense of inspirational and servant leadership often ‘the joy of and inspiration behind doing business is just sucked out of people’ and their levels of motivation decrease dramatically.
On the other hand when the balance shifts dramatically in the favour of Leadership at the expense of sound management principles and practises you end up having this wonderful dream of a global and sustainable business without any strong foundations under this dream.
By co-creating an in inspiring vision with your team and always ensuring that there is a strong element of future direction and inspiration within all meetings, systems and processes and that you take action based upon your companies shared value system you can be empowered to create a balance between Leadership and management which indeed is a potent combination.
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