Archive for the ‘profitability’ Category

Why 85% of business improvement strategies fail!

The internet has caused an explosion of knowledge or the availability of knowledge. This has caused people to continually search for something new to help them. This is obvious with diets. Although there is already a large amount of information on dieting, people are always looking for that new improved diet to help them lose weight.

I have found the same thing happens with people managing a business. They are always after the latest product that will give their business the edge. I have experienced this a number of times over the past few months. I receive comments about how my presentation or e-book has nothing new in it.

Although there is nothing wrong with trying to continually improve your business, research shows that around 85% (just like the weight loss industry) of new business management products add no value to a business except to the person selling the product. However, we keep trying to find that silver bullet to  our business the edge.

I am not saying these new management theories or products are bad or don’t work. Many will work in the right environment. However, many businesses haven’t mastered the basic principles needed. Those old pieces of wisdom that haven’t changed in years.

The formula for gravity hasn’t changed over the years. NASA has to get this formula right before trying any of its new technology when launching a space shuttle or the shuttle will come crashing back to earth. The same principle applies to business. If you don’t understand the critical numbers and how they affect your business then any gains from new management theories will be short lived.

Before trying to find the latest and greatest product to help your business make sure you have the old tried and tested basics in place.


Internal Causes of Poor Cash Flow

This blog continues on from yesterday and describes the internal factors that can affect cash flow. Internal factors are those that are within the control of your business. It is important to diagnose the factors that are affecting cash flow in your business. If misdiagnosed you will waste valuable resources trying to fix your cash flow problem. The examples in the factors are based on a book retailer like yesterday’s blog.

  1. Profitable – For a sustainable positive cash flow a business needs to be profitable.
  2. Debtors, stock and creditors – Poor control of these three factors can cause major cash flow problems. They are the silent killers of cash flow. For example, when the shop moved into the larger premises the amount of stock doubled, this stock had been financed from the cash in the bank.
  3. Over capitalised – The purchase of assets that are not producing a reasonable return on investment will affect cash flow. For example, the new shop required new fixtures and fittings however there was no increase in revenue from the investment.
  4. Too high borrowings – The business has borrowed too much and its loan repayments are causing cash flow problems.
  5. Taxation – The business can encounter problems when it doesn’t set aside money for income tax. Another problem is spending GST or VAT collected before remitting it to the tax department.
  6. Owners – The owners of the business withdraw more cash out of the business than the business is generating.
  7. Unplanned or uncontrolled growth – This can be one of the biggest causes of cash flow problems in small business. It results in overtrading, i.e. buying and selling more than the resources of the business can handle.
  8. Lack of planning – Cash flow is all about timing. If a business is not prepared for large payments it will affect the cash flow.
  9. Poor quality financial information – The lack of regular financial reports will cause poor decisions to be made.

10.  Poor internal controls – Internal controls are procedures to safeguard the business’s assets. For example, no procedure to follow up overdue customers.

Early diagnosis by doctors can save lives. Similarly, early diagnosis of cash flow causes can save your business. Relying solely on the traditional financial statements to ensure a healthy cash flow is not enough. To diagnose the real cause of poor cash flow in your business you will need to go beyond the numbers of the financial statements.

If you have cash flow problems then learn simple strategies that you can start using today that will increase your cash flow and make your business a success by downloading the ebook 10 Cash Flow Strategies for a Successful Business free. Click here to get your copy.

Does cutting expenses always lead to improved profit?

The latest retail figures revealed that sales rose 0.2% in May as people spent more on clothing and in department stores. However, NAB’s monthly survey of business confidence and business conditions showed that profitability is dropping. After seeing all the discounting that department stores have been advertising, it makes sense that profit has been falling even though sales have increased slightly.

If sales remain constant but margins have dropped then the first port of call for businesses is to cut costs. Increasing your profit by cutting operating expenses is generally a wise thing to do, however it may also cause your profit to decrease even more than if you did nothing. This can happen when we cut spending on the resources that give us the edge on our competitors.

Our competitive advantage may come from many different areas. One example for retailers is a high level of customer service. If customer service is your competitive advantage then reducing staff would be one of the last areas you will want to reduce. My cousin works for a major department store and the store cut back the hours of many of its staff. However, the media are now reporting that it is taking an hour to get served. If this is true then it is probably correct to assume that sales are being lost due to the lack of customer service and the bad publicity associated with it.

While it is not possible to know whether the decision to cut staff decreased the profit of the store more than if they did nothing, it does remind us that when making decisions about our business we need to consider more than just the short term profit. The long term effect of cutting costs needs to be weighed against the short term objective of increased profit.

A simple method to ensure you aren’t reducing your competitive advantage:

  1. List up to 3 factors that you and your staff believe give you a advantage over your competitors.
  2. List the resources and quantity needed for you to maintain that competitive advantage.
  3. When deciding on cutting costs refer to your lists to ensure you aren’t reducing your competitive advantage.

This method is obviously not an exhaustive process. It will help you consider what is important in running your business.

Categories: expenses, profitability