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Profitability: 5 + 5 = 50

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Don’t think that 5% you just gave away to the customer makes a difference? Think again.

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If your dealership works on a narrow profit margin, raising prices just 5% will have a tremendous impact on your bottom line. Say your annual gross revenues are $1 million. With a 15% margin, profits are $150,000. Not bad.

But if you raise prices just 5%, total revenues increase $50,000 and net profit jumps 25% to $200,000!

Now, if you cut your costs 5%, you will have a similar net profit increase of $50,000 – another 25% increase. So the results of increasing prices 5% and reducing costs 5% is a 50% increase in gross profit.

Most businesspeople are wary of charging the full price for the products/services they sell. But ask yourself: How much business would you really, absolutely lose if you raised prices 2%, 4%, 5% or even 10%? Real lost business, not mildly upset customers. If the answer is none – or even very little – boosting your prices should be considered.

In terms of cutting costs, one place to turn is your suppliers. The best way is to determine exactly what you want to pay, then work with your suppliers to get to that price. If you set a 5% overall reduction in price as your goal, work hard to achieve that level.

Operational costs you can look at include salaries, marketing, shipping, employee benefits and office expenses. Many of these can be tightened without hurting overall business.

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Myth of More Sales
For some companies, growth is the most important thing. Everyone sets their sights on beating last year’s sales numbers. And they spend 12 months stressing because they don’t know how they’re going to succeed.

But sales growth doesn’t mean profit growth. They are entirely separate matters. Unfortunately, many business owners believe that more sales bring more profit.

Remember the adage “It takes money to make money?” Unless you can boost sales without increasing fixed or variable costs, you clearly have to spend money – adding sales staff, office expenses, etc. – to increase revenues.

Here are some other traps small businesses often fall into:

  • Any business is good business – No, the only good business is business you profit from. Learn your financials so you can monitor the plus factor of your sales efforts. You may have a high maintenance account that is cutting into your margin. Another may not be paying full price. Still another promised higher sales, but hasn’t delivered. Or one may be a credit risk.
  • We’ll make it up on volume – That is simply not mathematically possible. Think about it. If you sell 10 things at 20% profit, you won’t realize a higher profit margin by selling 1,000 things at 20%. If you’re losing money on the sales you have, more sales will only increase losses. Price your products/services so they deliver the profit margin you need, and keep your expenses in line so more of your sales dollars stick to the bottom line.
  • It really doesn’t matter what the sales results are – The bottom line is your bottom line. It all comes down to cash flow – conversion of sales AND receivables into real dollars – and how much profit you really made. You can’t run a company on if-comes or, even worse, future dollars. Make the sale, send the bill, and get it collected as soon as possible.

Measure by Liquidity
You may think the term “liquidity” refers to cash on hand. In reality, liquidity means having the assets necessary to meet all immediate financial obligations. It’s a measure by which you can objectively judge your company’s performance.

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A few terms need to be defined first:

  • Current assets – Anything that can be turned into cash within a specific period of time, usually six to 12 months. Current assets include cash, inventory that can be sold within an established timeframe, all receivables that will be paid within that time, and other assets.
  • Current liabilities – Obligations that must be paid within a specified time frame, which can include mortgages, business loans, rents, insurance premiums, payments to suppliers, and so forth.
  • Working capital – The difference between current assets and current liabilities. A negative number is not good. Considering working capital prevents you from thinking that a sudden influx of cash means your company is automatically liquid and profitable. You must consider liabilities in the process of determining liquidity.

Another way to establish liquidity is to determine your business’ current ratio, which is found by dividing current assets by current liabilities. Current ratio shows how equipped your company is to pay its liabilities. Your current ratio should be 1.0 or greater, as anything less than 1.0 means liabilities exceed assets. Many companies aim for a current ratio of 2.0 or more, meaning that liquidity is great enough to satisfy immediate liabilities and have reserves for unforeseen expenses.

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Tackle Slow Payers
Cash crunches can come quickly when even a few customers get slow on paying. Don’t wait until you’re deep in a cash flow crisis to start calling in all credit payments owed you. And stay on top of your credit schedules to prevent future problems.

No matter what terms of credit you’ve extended, when payments are due, contact the accounts within a reasonable period of time. You may be reluctant to start calling and collecting, but it’s up to you to keep your business running smoothly.

Here are some easy tips to handle slow payers:

  • Re-send the original invoice, and enclose a note – or stamp the invoice – stating that payment is past due. Make sure your note and the invoice include the date of the original invoice, the amount due, any associated late charges, how late the invoice is, and when you expect payment.
  • If that fails, get on the phone and talk to the accounts payable person. Restate the original invoice date, the amount due, assessed late charges, and ask when you can expect payment. The goal is to make sure the check is written and sent to you as soon as possible.
  • Do not accept “I’ll send it soon” as an answer. This is when you need to be firm with the customer, but don’t get threatening. Get the customer to agree to a specific date by which you’ll be paid. You may even insist they pay a percentage – perhaps 25% to 50% – immediately in exchange for a minor extension for complete payment.
  • Consider adding a discount for early payment to your credit terms. It doesn’t help collect past dues, but it can help encourage early or on-time payment in the future.
  • Check past dues at least weekly so that problems can be handled before they get out of control.
  • If necessary – and other reasonable means of collection have been exhausted – turn the account over to a collection agency. This will end up costing a percentage of the amount due, but at least you’ll get most of your money.
  • Flag troublesome accounts, and insist all future purchases be paid in full at the time of delivery. Don’t offer continued credit to customers who are consistently late.
Cut Costs FirstEvery business experiences a downturn. When sales drop off, and there’s little relief in sight, it’s important to act fast to cut costs and tighten things up. How much you need to cut in these situations depends on how slow sales are, when you expect sales to rebound, and how deeply you can afford to cut.Most businesses make cuts incrementally, but the resulting cuts end up being quite small. This works if there is money available – bank credit lines or cash reserves – but it is often not enough.
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Try a new approach – cut costs first, then ask questions later. Instead of reducing your overall budget by incremental amounts, cut the budget to an extremely low level all at once, and require your staff to adjust. By doing this, your staff is forced to become creative in how they operate within the given budget. They might find new, more cash-efficient ways to do business. Perhaps entire processes will get cut and not really be missed.

Unfortunately cutbacks may require letting people go. The best advice is deal with your staff honestly, and do your best to help them get back on their feet as quickly as possible.

Be aware that this approach may lead to your cutting too deep. If so, it’s easier to recover from this position than from being too fat for current business.

Five Ways to Boost Sales Profits

Y our business depends on your ability to move your products/services quickly and profitably to customers. Here are five ways you can boost your sales and profits:

  • Hire sales people on the basis of proven sales ability, not their looks, relationship to you, and not their knowledge of your products. Good sales people can learn about products, but innate sales ability cannot be taught or learned. It’s important that your sales people be thoroughly familiar with your products and services – including associated warranties and potential add-ons.
  • Keep the channels of communication open between your sales staff and top management. Too many layers between the people who deal day-to-day with your customers and the managers who create and implement company policies will cause problems.
  • Remember that most sales people will automatically offer the deepest discount they’re allowed in order to assure the sale. Prevent this by basing sales commissions on profit margin, not on sales volume. Establish firm guidelines on how much of a discount they can offer.
  • Eliminate internal obstacles to sales. Make sure your operations can quickly and effectively support all sales activities. Quotes should be handled quickly, as should requests for technical information, and approvals from management. Anything that stands in the way of fast sales responses needs to be eliminated.
  • Keep a close eye on your staff’s sales-to-sales-expense ratios. If it’s costing you $6,000 to land $10,000 in business, you’re not doing well. On the other hand, a sales person might bring in $10,000 of business on $1,500 of expenses, a far better ratio. Keep in mind that every sales person has his or her own techniques and style, and you don’t want to set limits that hinder increasing sales.

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