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cost reduction

Managing hidden expenses

This article was written by Ed Hatton for Entrepreneur Magazine (South African edition), as the My Mentor column published in March 2016 and is posted here by their kind permission

 

The costs you don’t get invoices for

 

A potential customer walks away without buying after a bad experience with one of your employees. Your deliveryman cannot find the address so he returns with the customer’s order. Inventory at the back of the storeroom lies unused and unsaleable. A manufactured item fails a quality check and has to be remade. Clerks spend large parts of the day reconstructing lost information. These and many other failures cost your company a large amount of money, and yet the cost is almost invisible. These are the intangible costs for which you do not get invoices. They are typically a substantial part of the total costs of running a business.

Intangible costs include overstaffing, overtime, overstocking, excessive transport costs, scrapped material, excessive rent and loss of profit from lost customers and lost sales which should have been made. Few raise alarms or are subject to intensive cost cutting drives, simply because unlike direct costs nothing highlights their existence. To illustrate this point image a scene where every lost sale generated an invoice for the loss of profit. There would be a predictable response to improve competitiveness and service, but the lack of visibility of lost sales makes this response unlikely. The loss of profit is as real as the cost of wasted stationery, but seldom gets as much attention. Continue reading

Getting better margins

2014_AugustThis article was written by Ed Hatton, the Start Up Coach for Entrepreneur Magazine (South African edition), as the My Mentor column published in July 2014 and is posted here by their kind permission

 

Are you paying enough attention to this profit generator?

 

 

The difference between turnover and cost of sales is the starting point of profitability. Entrepreneurs drive their sales aggressively and manage operational costs tightly, but seldom pay as much attention to the crucial issue of margin. This is missing an opportunity to increase profit substantially with a little additional work.

Margin (or gross profit) is the difference between turnover and cost of sales, and it often comes from a simple percentage mark-up on all cost prices. This is a lazy way of setting the amount of gross profit your business will secure, and ultimately the net profit. You can do a lot better than that.

There are at least four opportunities to increase the total gross profit: More sales, higher prices, lower cost of sales and changing the product mix to increase the percentage of high margin products or services sold. Naturally this last one only works if you do not have a one-margin-fits-all lazy margin strategy. A tip to sell more is to increase the average number of items sold per order. Even a tiny percentage increase can make a significant difference to total margin. Look at the example of burger franchises which invite you to add a slice of cheese to the burger. If just 10% of all customers buy that very high margin slice of cheese they make significant extra profit with minimal effort, and it is so simple. What can you do to increase the items per order? Extended warranties, service contracts and training all offer opportunities. Continue reading

Tough times

Image courtesy of Paul FreeDigitalPhotos.net

Image courtesy of Paul FreeDigitalPhotos.net

How to negotiate difficult market conditions

“It’s tough out there” a veteran entrepreneur said to me recently, “this is the worst I have seen in 30 years of trading in this market”. Many businesses are really feeling the pinch as the long lasting effects of the global economic downturn slash budgets and postpone new developments. The phrase about tough conditions is heard frequently.

In the local marketplace labour unrest which often turns violent, energy cost and availability concerns, high inflation, increasing red tape and low labour productivity add to the problem. During the good times competition increased with more companies being launched or expanded. This means a shrunken market is being contested by too many suppliers with high and increasing costs. Buyers become more demanding because they can – there is always someone who will shave the margins to the bone just to keep the factory ticking over and some staff employed.

Effective action

Good entrepreneurs react to situations like this; they do not simply accept that times are tough and that their businesses will underperform. The business needs to win more of the scarce business, effectively denying this slice to competitors, and it needs to compensate for increased costs by increasing efficiencies. Continue reading

The Somali lessons

image courtesy of Freeimages.co.uk

Humble shopkeepers can give lessons in marketing strategy

I recently read an article about the lives of Somali shop owners operating in a Cape Town township. They lived a very stressful life, with the continual fear of xenophobic attacks from community members, and the criminals who used the simmering xenophobia to provoke attacks and loot their stores. Insurance is not an option for them.

They described how they chose their location in the poorest sections of the communities. Residents have almost no income, and so travelling to a distant shop consumed too much of their discretionary spend, and they wanted the lowest prices for staples. Unit sales were small values, and at times a shopper would appear with a single coin. All he could buy with that would be one cigarette or a sweet. And he made the most of his purchase – choosing a sweet then changing his mind for a cigarette then rejecting the cigarette and choosing some gum.

The Somali shopkeepers treated him with dignity and patience, knowing that shopping was a rare treat for him. Many local shopowners would have chased him away. Going to a supermarket was simply not possible for this customer.

Lesson 1

They chose their target market location carefully, selecting areas which put them in considerable danger and not very pleasant circumstances, but free of competition, and better able to service their customers. And then they gave wonderful customer service to even the least significant customer, treating him like a millionaire. How many entrepreneurs have been as visionary, and how many can say hand on heart that they treat all customers with equal respect and service? Continue reading

Taking baby steps – a strategy to overcome disaster

pic courtesy of imageafter.com

pic courtesy of imageafter.com

Here is a familiar story. A good and profitable business sees a potential threat become reality and turnover falls suddenly. The former comfortable profit becomes a monthly loss.

The first imperative is to stop losing money which means that there must be more gross profit or lower expenses or both. Surprisingly tiny, almost insignificant changes will stop the company losing money. It’s the practice of taking baby steps instead of giant leaps.

For example: A business turns over of R1M per month before the crisis at a gross margin of 40% with operating expenses of R350K per month, leaving a net of R50K per month. To simplify the accounting this article will look at profit per month, as if this was a cash business and ignore tax. Say turnover shrinks by 20% after the disaster strikes, and the profit turns to a loss of R30K per month.

If, instead of making radical changes or retrenching staff, the company implements a careful strategy of tweaking several factors the loss can be eliminated without major change. Continue reading

The new base line

pic courtesy of imageafter.com

pic courtesy of imageafter.com

In an economic downturn, as the world experienced recently, many small business owners react in peculiar ways. They will tell anyone who will listen about how bad times are while ignoring the depressing effect these words have. While they are usually skilled decision makers they often panic and retrench skilled staff, cut back on customer support and otherwise cut costs but have no plan to review these changes in the future. They avidly read case studies of businesses that have found a wonderful solution to their plummeting sales and therefore become recession proof; and then desperately try to find a similar ‘magic wand’ answer for their own business.

Some operate in the hope that the bad times are a temporary blip on an otherwise smooth growth path; an inconvenience which will disappear soon. They believe that at worst it may mean retrenching a few unwanted workers. They will prepare highly optimistic forecasts for the future, anticipating that ‘things will get better’ in a few weeks or months time.

A better way

There is a better way to weather these bad times. But first the small business owner has to face a few facts: Continue reading