What's new in managing small business ideas for profit improvement
What's new in managing small business ideas for profit improvement, obtaining financial resources, and rebuilding sales
By Richard Walton, Assistant District Director for SCORE
For this month's article, I have pulled together useful ideas addressing critical small business managerial issues. They are profit improvement, obtaining financial resources, and rebuilding sales. Each has taken a major hit during the recent recession, and it is time that new policies and procedures for dealing with them are brought to bear in the changed environment of 2011. Each is linked to the others, so that we will be addressing the connections among them rather than as separate issues.
Profit Improvement is a major issue since many businesses have seen lowered profit during the recession primarily resulting from reduced sales coupled with higher costs. Compounding the dilemma is the difficulty of obtaining financial resources needed to reverse the current trends and reset the firm on a profitable trajectory. The one position we cannot take at this time is that 'things will get better as the economy improves'. We need improved profitability here and now, regardless of the prevailing conditions.
This is accomplished primarily by the tools of financial management coupled with the tools of marketing and sales. The first tool of profit improvement is breakeven analysis by which every item the business makes and sells is subject to profitability analysis. The products that show a profit are those that the firm emphasizes in its marketing and sales efforts. The others are de emphasized via price increases. In addition, the firm's financial managers use ratio budgeting (measuring the ratio of costs to revenue in each cost area) with a drive that is primarily directed toward reducing costs in line with revenue levels so as to breakeven. Breakeven operations are a necessary factor in enabling the firm to secure needed financial resources, and thereby to rebuild marketing and sales efforts to attract new business.
OBTAINING FINANCIAL RESOURCES
As a SCORE counselor for a number of years, I have received and worked with many clients who are primarily concerned with obtaining financial resources, such as grants and/or loans. Many of these requests do not produce positive results, primarily because there is no evidence presented that shows how the organization will be able to repay the loan. Addressing this situation requires the effective use of a program of profitability improvement as shown by pro forma financial statements (financial statements that are projected into the future showing the results to be expected from profitability improvement and increased revenue from sales). In addition, the firm should be proactive in providing answers to the current position of its business operations, and how they will be made profitable. The firm should also have a representative research all available financial resources (more than just commercial banks) in order to explore all available options. When a financial organization is selected for approach and application, the presentation needs to fully address the key issues of profitability and sales revenue, since these important factors determine whether the borrower can repay the loan.
The final element of our three pronged approach is rebuilding sales. Ordinarily, sales are reduced as customers cut back on their purchases in anticipation of lower demand, and thus a fear becomes a reality as the supply chain contracts and the cut backs form the basis of a self fulfilling prophecy. The worst thing to do in this situation is what most businesses seem to do, which is to lower prices. Instead, firms should offer more value for the customer's dollar, not less. This does not mean raising prices, but rather providing increased value, such as improved quality, faster delivery, favorable credit terms, and stronger after the sale service. One of the ways in which this can be done is to install a program of Reverse Logistics, by which the firm offers improved service in processing returns, and taking back excess inventory for re sale or disposal.
These activities can produce a relationship of constant process improvement, which can lead to profit improvement, and ultimately enable the firm to attract additional financial resources. Revenue can be rebuilt, but not by reducing prices, and thereby diminishing profit, but rather by adding value as a source of competitive advantage which can make even a higher priced product more attractive than a lower priced product from another supplier who offers a 'stripped down' product with no extra value provided.
We have at our disposal the means of improving profitability, rebuilding revenue, and ultimately attracting new financial resources to the firm. Each of these activities should be thought of not as a single discrete activity but rather one that is coupled for a synergistic effect with the others, leading to an improved, well financed, and growing business operation.
SCORE counselors can offer additional information and help on making this happen for your small business.
Mr. Walton teaches Entrepreneurship and Quality Management at Frostburg State University. He is also Assistant District Director for SCORE, Western Maryland, and the President of ERMACORP, a Hagerstown based Management Consulting Firm. He may be reached at 301-462-9850, or by email to Richard@ermacorp.com.