Thursday, November 29, 2007

Business Startups Serenade


Controlling Costs Key to Running a Business

With more and more small businesses and dot.coms going bankrupt these days, businesses are developing new strategies to stay in the game and obtain a profit at the same time. More than ever, not enough emphasis is being placed on controlling costs.

"Increasing sales is overrated. The old adage that volume cures all ills is outdated and moldy," explains Patrick Bruce, senior business analyst for The Bankcard Store. "I was brought up under the guidance of independent restaurant owners, whereby the net bottom line profit was all that mattered at the end of the night. It wasn't until I started to work for McDonald's in the 1970s that I was made aware of the need to increase sales each and every year. At McDonald's, marketing was king, and the way you decided whether that marketing was working was to compare year-to-date sales."

When sales are the primary focus, the net bottom line becomes a secondary issue, and that can become very dangerous. Bruce explains that when the focus is on sales, the staff can become complacent and the importance of the little things that rob a business of its net profit's daily can become lost.

Some business owners today do not understand how much money they leave on the table each day because they haven't taken the time to put "profit gauges" in their business. Profit gauges are important because they can tell you at any given moment if the business is running the way you designed.

"It always amazes me," said Bruce, "when I visit a client and they have these beautiful cars with high-tech gauges, oil gauges, digital radios and much more. Yet, when I ask them what gauges they use in their business they inevitably answer 'monthly financial statements.' Can you imagine if you only looked at the gauges on your car once a month? Yet most business owners spend more time worrying about their gas mileage than the productivity of their employees!"

Financial statements are after the fact and require a certain level of accounting experience and knowledge of tax codes to fully understand their function. Quite often, business owners expect their accountants to show them how to reduce cost and increase net profits. "They are not trained to do that," Bruce says. "They are trained to deal in historical information, not projections. Although they can certainly help in building net profits, they are by no means the answer to controlling cost." It is the business owner's responsibility to install the proper cost control gauges, and establish a predetermined net profit gauge.

But, when a client is asked about the profit gauges he uses on a daily basis, the standard answer is usually "that's why I have an accountant."

"Generally," said Bruce, "they become interested in profit gauges after they learn how much money they left on the table over the previous six months. Of course, they usually quickly realize that it is not the accountant's job to install cost control gauges."

Here is a simple tool to see how well you and your accountant are controlling net bottom line profits:

1. Gather your last six financial statements and see if there is a "percentage of total sales" column, or if your numbers are simply shown as dollars.

2. If there is a percentage of a total sales column, remove (or hide) the dollars column and simply show the percentages. If there is not, simply divide each expense item's dollar amount on your income statement by the total sales. This will give you the "percentage of total sales" for each expense item.

3. By doing this, you are creating the first instrument to "gauge" the consistency of your operation. For example, when you convert your dollars to percentages each month's total sales always equals 100 percent, so if the rent is $2,000 per month and total sales for that month are $20,000, the rent is 10 percent when shown as a "percentage of gross sales."

4. After doing that for each expense item, you can compare your expenses as a "percentage of monthly sales" each month.

Bruce states that the purpose behind such an exercise is to compare the proverbial apples to apples. "I do not know how many times over the past 15 years that I have heard from my clients, 'The reason my labor cost goes up is because my sales increased,'" he said. In actuality the cost of labor is reduced as sales increase.

Though Bruce readily admits that his thinking may be a little idealistic, he maintains that the owners who focus on the percentages rather than the dollars can manage their businesses more effectively.

However, he has found over the years that most small business people simply assume that if their sales increase their labor must increase as well. "No way," says Bruce. "The dollars may increase, sure, but the labor, as a percentage of sales, should go down." When both sales and labor increases, this is a clear indication of a lack of productivity, usually resulting from a lack of training. A problem easily fixed. " Productivity problems are the easiest to fix," Bruce confided. "As an independent owner you can have an affect on the people right away -- by changing the way you act you can change their emotional commitment to you and your business."

Of course, obtaining the right employees can be a problem, if you don't work hard at it! "Often, people's productivity is simply a case of a lack of training by the owner and how he wants things done," says Bruce. He relates the following story about an owner that paid dearly for not training his employees correctly.

This particular restaurant was known for their home-made lemonade, made with real lemons. Though there was no need to add additional lemons, the owner wanted each glass of lemonade, over 400 glasses per day, to have a lemon slice as a garnishment. When Bruce performed his business analysis he found that instead of 16 slices per lemon as the owner did, the servers were only slicing 4! Literally quadrupling the lemon cost -- as a garnishment!

Bruce feels strongly that it makes absolutely no sense to increase sales without first figuring out what the optimal profit a business can make on the business.

In addition, too many businesses do not realize the cost involved in increasing sales. "I remember when I finally secured my first professional marketing job with one of McDonald's regional advertising agencies, the total focus was to come up with ways to increase traffic to the local restaurants," said Bruce.

It was at this time that a young marketing representative heard Ray Kroc, founder of McDonald's, say that McDonald's was a penny business, and if you watched the pennies, the net profit would increase. The way he explained it to us was that one percent of $1.00 is 1 cent, and if you can save just one cent more from each dollar that you take in, you could earn an additional $10,000 on an average store volume of one million dollars," remembers Bruce. But if you have to spend two cents to increase sales one percent, you're losing money.

Bruce pointed to a promotion early in his career to illustrate his point. "In the year the Pittsburgh Steelers won their second Super Bowl, our agency came up with the concept of giving away a collectors set of McDonald's / Steelers Glasses featuring the Steelers Players. The promotion was a big success and sales were through the roof," he said. "The problem was that the glasses were breaking, and getting in the way of the operation, and the labor to load and unload the glasses got so out of control that the company actually increased sales by 19 percent and decreased profits by 103 percent!"

"We cannot separate ourselves from the profit aspect of this business," Bruce continues. "We must focus on getting as much profit as possible from every dollar taken in by the business."

When contemplating future business strategies involving cost controls, Bruce asks, "I wonder if owners realize that the reason they started their own business in the first place was to be in control of it and not have their businesses controlling them."

Net profit strategies starts with 'pre-determined' net profits based on a lifestyle a person wants. If you feel that spending all of your time in your business is a good lifestyle for you and your family, then Bruce recommends you stay the course. But if your want to increase your net profits and then increase sales -- after you have established an optimal profit -- perhaps you should consider installing cost control gauges in your business.

Courtesy ARA Content, http://www.aracontent.com.


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