Do you want your business to break even?

            If you seek advice before starting a new business or adding a new product or market, you will be advised to create a break-even chart.

This will involve calculating your fixed costs, such as rent and administrative employees. It will also mean forecasting your variable costs such as telephones, marketing and everything that will change in relation to your sales revenue. Direct labour and materials to produce your product is also a variable cost. Most importantly, it means setting your prices and gross margin.

Creating the break-even chart as, or before, you start means you are forecasting all the numbers. The chart is a ‘what if’ chart. During your first month reality will bite you on the ass. As you test the market you will find that your prices are too high or too low and you must change them quickly. Likewise, the amount you pay for your supplies. This immediately destroys the validity of the break-even chart. This will continue for several months, with changing prices for your product and for your purchases.

The break-even chart is a bit like a particle in quantum physics – you can measure it, but you cannot see it at the same time. Collecting the information on changes every day is onerous, especially when you are concentrating on sales. It might mean redrafting the breakeven chart every day or two. You might agree that’s out of the question. You are also likely to omit items because there is no verification system.

The answer is to have a monthly set of management accounts which will give you a comprehensive picture of the financial state of the company’s finances in an intelligible and accurate form. You don’t need a break-even chart when you have monthly accounts which contain far more accurate information than the break-even chart. Just react to what the management accounts are telling you.

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Who are your competitors?

            Many people believe that they have to do a Strengths and Weaknesses analysis, comparing their company with their competition. Having been a business advisor to over 200 entrepreneur-led companies I have never yet encountered any company that could do this analysis in any intelligible form.

            A business that had been trading for over 30 years, selling vehicle alarms, realised that their customers were drifting away. When visiting the company it was clear that none of the directors and none of the employees knew what was causing this erosion. I wandering around, conversing with the lower orders and picking up snippets of information.

            I discovered that an employee in the warehouse, who had been with the company from the start, had recently died. Apparently, this bloke was a ‘whizz’ at modifying the alarms, tailoring them to the customers’ specifications.

            Once the company had lost this employee the company also lost their competitive advantage and traded simply by shifting boxes, just like their competitors. This was the cause of their decline. Conventional research by the competitors would never have uncovered the company’s competitive strength.

            How do you identify your competitors? Ask your customers! How do you uncover the competitors’ strengths and weaknesses? Ask your customers! It is to your customers benefit that they tell you all about your competitors, because they will benefit by improving their buying choices. If they can turn you into a perfect supplier they will benefit themselves.

            If your competitor reduces their prices, you don’t have to react if your customers don’t even know about the price reduction. 

Sui Generis

Sui Generis

            Sui generis means one of a kind, something unique. But, if we come across an unusual item of information, we do not consider it to be unique. We try to understand it in connection with a familiar pattern and make it part of that pattern.

            Forty thousand years ago, whilst hunting in the woods we see something glistening yellow in the dark. We immediately look for the other eye and the teeth. The object that glistens might be our lunch or we might be its lunch. Until we can get a better look – more information, we believe it to be an animal. Experience has trained us to expect to find one in the woods, anyway. However, it might just be dew reflecting on an autumn leaf.

            John Hume, the great 17^th century philosopher used the word ‘induction’ to convey the notion that the future will resemble the past. In other words, we learn from the past and apply that learning to our decisions about our future.

            In the world of business the future is always different from the past. I’ll bet that your business has changed in the last year – new customers, new employees, sales prices and buying prices and maybe many other factors.

            In companies, one enthusiastic customer writing a letter of praise extolling the wonderful service that she got from the front-line guy might be interpreted as meaning that we have a seriously good frontline service team. This might result in ‘excellent service’ being moved to the top of the marketing proposition.

            The truth might be more mundane – five minutes before the customer phoned,  grumpy George had just heard that his bet on ‘Archimedes’ in the 3:30 had romped home in first place at 10-1 odds - hence, the cheerful service. You need to verify by a spread of different events, such as regularly monitoring the customer feedback.

            If you can see faces when looking at the clouds, you are satisfying the natural tendency to form patterns out of random snippets of information. It’s OK to see patterns, but they must be verified by importing more information and testing the validity of the pattern. As the world of business is changing all the time, slowly or quickly, you will never experience exactly the same state of play again, so beware of making decisions based on the past.

            Looking for patterns is a good idea; when you find a new one you could be on to something very profitable. Just put a bit more work into verifying it.

Giant Killer

Giant Killer

Everybody, including senior members of the government, Chambers of Commerce, SME Federations and many SME owners believe that it is the fault of the banks that lending to SMEs is too low.

Banks are profit- making companies, just like any other trading company. They have a responsibility to their shareholders to make profits and pay dividends, which might well contribute to your pension fund. The directors have a responsibility in law not to engage in providing dodgy loans which are likely to damage the bank.

The government, and others, assess only the net lending by banks to small companies. However, that does not take into account that small business owners, in difficult economic times, will try to repay their loans instead of borrowing more. Hence the net level of borrowing becomes lower.

In many cases, the liquidity problem faced by small companies is caused by late payments, particularly by large corporations. Recent BACS research reveals that large companies owe £24bn to small companies, paying the small company 39 days over the agreed payment terms.

However, the government have provided a means to make a profit from late payments from companies, big or small that do not pay on time. The Late Payment of Commercial Debts (Interest) Act, 1988 states that a company with less than 50 employees is entitled to claim interest at 8% per annum above the prevailing Bank of England base rate on all overdue payments. That 8.5% is not a bad return on your investment!

You can claim this interest if the debtor exceeds the previously stated terms of payment. If you have not stated payment terms, the Act assumes 30 days as the terms. You can avail yourself of the Act, provided the debtor is a company, regardless of size. 

The book 'How Companies Really Grow' is available from my website at a considerable discount. The blog is all new stuff, not extracts from the book.

Pareto's Law

            Many people believe that 20% of their customers account for the success of their business and the other 80% of customers are unprofitable and need to be ditched. Speakers on business topics and authors of business books promulgate this little gem.

            If you sack 80% of your customers then they will feel insulted and aggrieved. Assuming that you are dealing with a particular market segment, it is likely that many of the segment members will know each other. You could well be on the receiving end of a negative word-of-mouth campaign, not confined to the market segment.

            The facts are that this piece of nonsense is based on research by Vilfredo Pareto, an Italian living in the late 19^th century. He concluded, correctly, that 80% of the land in Italy was owned by 20% of the population. That is why it is called Pareto’s Law or, sometimes, the 80/20 rule.

            It is not a law! It is not even a reliable rule. 80/20% only applies to land in Italy, over 100 years ago. In your business the distribution could be 99/1% or 50/50% or any other divisions of 100.

            A company that I worked with manufactured in India and distributed through UK retailers applied the 80/20 rule to their customers. They graded their customers by sales revenue and got rid of the smallest customers – 80% of all their customers!

            Unfortunately, grading by sales revenue is totally wrong. They should have graded by profitability. A better solution would have been to raise the prices to those customers contributing the lowest profit. The price-sensitive retailers would fade away and those who accepted the price increase would raise the profits of the producing company.

            The Black Swan put in an appearance – they lost their largest customer about six months later, who had decided to design and source their own stuff.  A little later, they lost another large customer. Needless to say, the company went bust 18 months later.

Who Owns the Brand

Most companies believe that the brand belongs to them. Consequently, they invent a brand and then present it to the market. That’s a variation on the inventor’s naive view: “if I were them I would love this product”.  To engage in mindreading in respect of your potential customers is a big, big mistake.

Inhouse or Outhouse?

Many people believe that you need a shed-load of cash to start up a business. Most believe that that the first step is to write a hopeful business plan and then go to the bank and raise a loan.

Unless your business is a legal practice I’ll bet that you do not plan to have a full-time solicitor on your staff. How do I know that? Because you have insufficient legal work to keep a solicitor busy all the time.