Running a business isn’t easy. There are many things to consider and it can sometimes be overwhelming. The process of trying to answer these 9 questions will help to you identify how your business is performing and how prepared you are for the future, helping you make the right decisions to ensure continued success.
1. Is the business sustainable at existing sales, margin and backlog levels?
This question is far more important for businesses which are performing well than for those which are struggling. If sales are down and the business is losing money then the answer to this question is clearly “No” and something must be done soon to turn the situation around. It’s when business is booming and everything looks fine that this question car really help you plan for the future. Let’s break it down.
Sales:
Are sales up this year? If so, by how much? Was there a big order that makes up a significant portion of your sales for this year? Is that business repeatable or was it a one off? These are the kinds of questions you need to ask to understand the story behind the numbers.
Margin:
What margin are you making on your sales? Is the business profitable? Are your prices too low (not profitable) or too high (forcing your customers to look elsewhere for a better deal)? Many businesses sacrifice margin early on to “get the order” and worry about how to make a profit later on. This is often a very bad idea for two key reasons:
1. Customers are fickle and are unlikely to remain loyal because of your one time generosity. They will expect your prices to remain low or they will look elsewhere for a better deal.
2. You artificially reduce the market rate for that product or service, thereby forcing your competitors into an equally uncomfortable position. Nobody wins in the long term.
You pricing should be driven by sustainable growth.
Backlog:
Managing backlog is a balancing act. If it’s too big, you won’t be able to take on new business and your customers will go elsewhere. If it’s too small, you risk your staff standing idle when there is a lull in sales. How do you decide on the correct size? How do you prioritise your customers if it gets too big? There probably is no right answer and you won’t ever get the backlog to exactly where you want it to be but it can be managed to an acceptable degree.
2. Can the business adapt quickly to a sudden rise or fall in sales revenue?
Do you have one customer who accounts for more than 20% of your sales revenue? What if they decided to go elsewhere? Would you have to let staff go? What if another large customer came along with a similar budget? Would you be able to take them on? A business needs to be flexible enough to adapt to either of these scenarios quickly and efficiently.
3. Is the business achieving the right product mix to maximize profitability?
Most businesses offer a range of products and, for various reasons, some of those products will be more profitable than others. How do you ensure that you are getting the right mix? Let’s look at an example.
Company XYZ has a factory that produces two types of widget, widget A and widget B. Both widgets take exactly the same amount of time to manufacture and the factory can output 1,000 units per month in total. Widget B costs twice as much to produce and sells for twice the price.
Widget
Widget A
Widget B
Cost
$25
$50
Sales Price
$50
$100
Margin
$25
$50
The margin remains the same as a percentage of the sales price in both cases. However, the same factory with the same people working full time on the same machines can produce double the profit if the company focuses on Widget B vs Widget A.
This is obviously an over simplified example but most businesses are limited in their output capacity so it’s worth examining the profitability of the current product mix.
4. Do customers buy primarily on quality, price, delivery or customer service?
Quality, delivery and customer service all affect price. Some customers are happy to pay a premium for shorter lead times or for the excellent advice you give on the phone. Others are just looking for the lowest price. Understanding your customers’ motivation is key to aligning your business to the market.
5. Could the price of certain products be increased without losing business?
Once you’ve established the customers and products for which price is not the driving factor, it’s worth exploring the option of increasing those prices. It’s also worth remembering that you don’t have to charge the same price for the same product every time.
Think about the last flight you took. Almost everyone on-board will have paid a different price to be on the same flight but none of them are unhappy with the price they paid. Some paid less because they booked very early or very late. Others paid more for extra legroom or the flexibility to change the date on their ticket but they all bought virtually the same product.
6. What is the average quote time and are slow responses impacting your hit rate?
This is really simple but so many companies get it wrong. If a customer has sent you an enquiry, the chances are that they’ve sent the same enquiry to at least two of your competitors. If you take too long to quote, you’re going to lose the job to someone who quoted faster. If you’re not measuring time-to-quote and hit rate already, start now.
Ideally, all quotations should be submitted within 24 hours of receiving an enquiry. If that’s not possible then at least submit a budgetary price for them to consider while you work on the proposal. This will show the customer that you are responsive and engaged and significantly increase your chances of winning the job.
7. Where are your customers?
It’s well worth mapping out where your existing and potential customers are in the world. If your company is based in California and 50% of your business comes from China, it might make sense to establish a physical presence there or at least partner with a local agent or distributor. We live in a global economy but, despite the fact that you’re only a phone call or a flight away, most customers still like to deal with someone local.
8. Is the brand well known to potential customers?
The stronger your brand, the more likely a customer is to buy your product and the more they will be willing to pay. All other things being equal (quality, price, delivery), the customer will choose the brand they trust. If they haven’t worked with you before then then trust comes down to familiarity. The more you can get your brand in front of the customer, in a wide variety of platforms, the more they will trust your company.
9. Are your products actively promoted?
Some businesses run perfectly well by letting the customers come to them. They don’t need sales reps, agents, or distributors. This is rare though. Most businesses benefit greatly from actively promoting their products and services. Either through direct sales, distribution, advertising, exhibiting at trade shows or any other means. Is there more you could be doing to actively promote your business?
For more information about the data you need to collect to answer these questions, read ‘What is Marketing?‘ or click here to browse for other subjects.
