Marketing: Expense or Investment?

Tips and Tools“Julia, I am overwhelmed with the number of advertisers and marketing sales people who all offer great deals to help me attract more customers.  How do I know who to “believe” or know what will work?”

If you have met me at least once you have heard me say “I don’t do law and I don’t do taxes!” I don’t do marketing either!  In fact, I have been known to say that marketing is a necessary evil, which doesn’t make my marketing friends happy!  The point is, without marketing, how do customers know who you are and what products and services you offer? You can be really good, even great, at what you do but if no one knows about you it is pointless to call yourself a business because you are simply supporting your hobby!

Many of our clients are overwhelmed with phone calls and emails on how to gain new customers by signing up for countless marketing opportunities.  So, how do you decide what to do and how much to spend on marketing activities or campaigns?  The best approach is to budget appropriately and understand what the return on your investment (ROI) will be.  We cannot predict the future but there is a way to measure a return on investment for marketing activities used to obtain future customers! 

What is Marketing?

Marketing is the wide range of activities involved in making sure that you’re continuing to meet the needs of your customers and getting value in return. Marketing is usually focused on one product or service. A marketing plan for one product might be very different than that for another product. Marketing activities include “inbound marketing,” such as market research to find out what your target groups of potential customers are, what their needs are, which of those needs you can meet, how or where you should meet them, etc. Inbound marketing also includes analyzing the competition, finding your market niche, and pricing your products and services. “Outbound marketing” includes promoting a product through continued advertising, promotions, public relations and sales.

Before discussing the return on marketing investments, let’s review other popular words that confuse most non-marketing folks!  The most frequent words I hear clients interchange are:

  • Advertising – bringing a product (or service) to the attention of potential and current customers. Typically done with signs, brochures, commercials, direct mailings or e-mail messages, personal contact, etc. Find out who your target is and advertise where they hang out!
  • Promotion – keeps the product in the minds of the customer and helps stimulate demand for the product. Involves ongoing advertising and publicity.
  • Public Relations – include ongoing activities to ensure the overall company has a strong public image.
  • Publicity – mention in the media. Organizations usually have little control over the message in the media, at least, not as they do in advertising. Good publicity is free advertising!
  • Sales – cultivating prospective buyers (or leads) in a market segment; conveying the features, advantages and benefits of a product or service to the lead; and closing the sale (coming to agreement on pricing and services).

A few years ago I found a quote in “Promoting Issues and Ideas” by M. Booth and Associates, Inc. that says it perfectly:

“… if the circus is coming to town and you paint a sign saying ‘Circus Coming to the Fairground Saturday’, that’s advertising. If you put the sign on the back of an elephant and walk it into town, that’s promotion. If the elephant walks through the mayor’s flower bed, that’s publicity. And if you get the mayor to laugh about it, that’s public relations.” If the town’s citizens go the circus, you show them the many entertainment booths, explain how much fun they’ll have spending money at the booths, answer their questions and ultimately, they spend a lot at the circus, that’s sales.

Understanding the difference in the above activities is just part of the equation.  The ultimate challenge is to choose how to spend your marketing dollars! Learn to know what is working and what is not! 

What is a Return on Investment?

Return on investment (ROI) is a measure of the profit earned from each investment. Like the “return” you earn on your portfolio or bank account, it’s calculated as a percentage. The calculation is:

(Return – Investment)

It’s typically expressed as a percentage, so multiple your results by 100.

In simple terms, marketing ROI is implementing a system of measurement to help determine or confirm that you are getting at least $1.01 back in sales for every $1.00 you spend on marketing the product or service. Marketing ROI can be applied to either an individual marketing tool like email marketing or to a campaign itself.

Applying the ROI formula to marketing:

ROI calculations for marketing campaigns can be tricky but once you master it you will begin to approach this expense category differently and more confidently. You may have many variables on both the profit side and the investment (cost) side. But understanding the formula is essential to produce the best possible results with your marketing investments.

The components for calculating marketing ROI can be different for each organization, but with solid ROI calculations, you can focus on campaigns that deliver the greatest return. For example, if one campaign generates a 15% ROI and the other 50%, where will you invest your marketing budget next time? If your marketing budget only returns 6% and the stock market returns 12%, your company can earn more profit by investing in the stock market.

Basic Marketing ROI Formulas: Which one will you use?

One basic formula uses the gross profit for units sold in the campaign and the marketing investment for the campaign:

Gross Profit – Marketing Investment
Marketing Investment

However, some companies deduct other expenses and use a formula like this:

Profit  – Marketing Investment – *Overhead Allocation – *Incremental Expenses
Marketing Investment

*These expenses are typically tracked in “Sales and General Expenses” in overhead, but some companies deduct them in ROI calculations to provide a closer estimate of the true profit their marketing campaigns are generating.

Why you want to use ROI on marketing campaigns

ROI helps you justify marketing investments. In tough times, companies often slash their marketing budgets – a dangerous move since marketing is an investment to produce revenue. By focusing on ROI, you can help your company move away from the idea that marketing is a fluffy expense that can be cut when times get tough.

Best Approach Minimum Effort

Common Approach

You measure and track the ROI of all of your marketing investments. Your campaigns deliver the highest possible return and you’re able to improve them over time. You understand the choices you make because there’s solid data to support your investments. You calculate ROI on some investments, but because it can get complex, you don’t attempt to measure it at all times. You have a general idea of how your investments perform relative to each other, but you can’t pinpoint the exact return you’re generating. And in tough times, your budget is cut. You don’t measure the performance of any of your investments. In fact, marketing is viewed as a cost, not an investment at all. Your company isn’t sure what works and what does not and it’s a struggle to meet goals.

Where to start

It’s a good idea to measure ROI on all of your marketing investments – after all, you’re in business to earn a profit. If your sales process is long and complex, you may choose to modify or simplify your ROI calculations, but a simple calculation is more useful than none at all.

1. Confirm your financial formulas

There are several figures you’ll need for your ROI calculations:

  • Cost of goods sold (COGS): The cost to physically produce a product or service.
  • Marketing investment: Typically you’d include just the cost of the media, not production costs or time invested by certain employees; however, in certain cases it may be better to include all of those figures.
  • Revenue: It can be tricky to tie revenue to a particular campaign, especially when you run a variety of campaigns and have a long sales process. This is why it is important to outline before you start a campaign and know how you will track results.

2. Establish an ROI threshold

Set an ROI goal for your entire budget and individual campaigns; set a base as well. By doing so, you gain more power over your budget. If you project that a campaign won’t hit the threshold, don’t run it; if you can’t get an ongoing campaign over the threshold, cut it and put your money elsewhere.

3. Set your marketing budget

When you have an ROI goal and annual revenue/profit goals, you can calculate the amount of money you should spend on marketing – just solve the ROI formula for the “investment” figure. You’ll be more confident that you’re spending the right amount of money to meet your goals.

4. Calculate ROI on campaigns; track and improve your results

Tracking ROI can get difficult with complex marketing campaigns, but with a commitment and good reporting processes, you can build solid measurements, even if you have to use some estimates in the process.

Use your ROI calculations to continually improve your campaigns; test new ways to raise your ROI and spend your money on the campaigns that produce the greatest return for your company.

You must have a way to measure a return on investment for marketing activities. Remember, you can’t manage what you can’t measure!  Track, track, track results! 

Tip- Determine what your marketing budget should be each year. The general rule of thumb for calculating your company’s ideal marketing budget is below:

*Total Revenue x 5% = budget required to maintain current awareness/visibility    

*Total Revenue x 10% = budget required to grow and gain market share

*Average and varies per industry

Managing Change: Not for the Faint of Heart! part 1

Tips and Tools“Julia, I am working as hard as I can to make changes in my business.  Why do I feel like I take two steps forward only to take one step back?”

The number one challenge for our clients is managing change! This is not an area most folks enjoy thinking about.  What we find at Stanford is not that the business owners we work with don’t want or need change; rather, they don’t understand how to plan for and implement change.  Sometimes, you have to take one step back in order to take two steps forward!
 There are hundreds of books written on change management.  I personally love to teach business owner’s how to tackle making changes in their business so I could write on this topic for a year! I will split this topic into two post in order to cover what I feel is most beneficial for business owners to consider when making changes in their business.

What is Change?

Change is the only constant that we can rely on in the business world.  It is critical for business owners to:

  • Understand change
  • Promote change
  • Cope with change
  • Value change

Although it seems an obvious question to begin with – the differences in how people perceive change is quite amazing. We find that the easiest way to understand what change represents is to know where you are and where you want to be – all you have to do now is get there.

Seems pretty straightforward doesn’t it!

Well that is the theory but the practice can be a lot harder especially when you understand that it’s not only you that needs to know this but everyone who may be impacted by the change.

What Drives Change

The need for change can come from multiple sources both internal and external:

  • Customers
  • Internal processes
  • Employees
  • Economic conditions
  • Competitors
  • Suppliers
  • Technology
  • Culture

Business owners have to understand the many sources that drive the need for change and their impact, both actual and potential, on the activities that allow the business to operate and produce revenue.  The ability to cope with the changes is critical to long term survival.

Types of Change

There are several types of change, each with its own set of characteristics and impact on the business. Which type of change do you think is more easily controlled and preferable to a small business?

Incremental Change

The characteristics of incremental change include:

  • Mostly happening
  • Evolutionary
  • Can be planned
  • Can be invisible
  • Can be deceptive
  • May be culturally driven

Transformational Change

The characteristics of transformational change are:

  • Rarely planned
  • Difficult to control
  •  Can be overpowering
  • Can be unavoidable

Planned Change

For planned change the characteristics include:

  • Focus is on structure, systems, and processes
  • Focus is on implementation & planning
  • Emphasis is on the people involved because organizations don’t change – people change!

Of course, planned change is more easily controlled and preferable to a small business.  Again, understanding where you are and where you want to be are the first steps in how to get there. Planned change is most often achieved because you are focussed on outcomes. The most successful outcomes are leader, process, or improvement driven changes.

Preparing For Change

The most important pre-requisite for change is a clear shared vision. This vision, along with the capacity for change and defined steps to achieving goals, will reduce frustration for all affected by the change.

The ability to see and understand how the business will benefit is vital. Change is most effective when people involved clearly understand:

  • Why the change is necessary
  • What the change will mean to their activity
  • Where or how the change will bring improvements

People need to believe in the change to give it their full support and commitment so a clear vision of what the change is about is vital.  The vision will be dependent upon the following organizational factors

  • Purpose
  • Culture
  • Values
  • Mission

The vision is central and is dependent upon

  • Conveying an imaginable picture of the future
  • Appealing to the long term interests of the people
  • Consisting of realistic and attainable goals
  • Being clear enough to guide decision-making
  • Being flexible enough to allow individual initiative as well as adjustments for changing situations
  • Being easy to explain and understand.

Without a clear vision there is a high chance of the change failing and this may have a significant negative impact on the survival of the business or goals.  It is important to look at and understand the reasons why change fails.

Without taking heed of the negatives and planning for the positives to be implemented, change will be seen as a resource draining activity that is unwelcome in the organization. The ability to plan, implement and manage change successfully provides a business with a significant competitive advantage in today’s business environment.

We will look at Resistance to Change & Why Change Doesn’t Work next time.

Click here for Part 2

Getting to the Root; The Bottom Line to Solving Problems – part 2

Tips and ToolsJulia, you are always saying WHY, WHY, WHY, WHY, WHY! What is so important about why?”

Read Part 1 here.



Developing the Solution

The solution devised and implemented must meet the following criteria:

  • The problem must not recur
  • The solution cannot have additional negative effects
  • The solution must be appropriately implemented
  • The resources required to implement the solution must be kept to a minimum.

Two simple techniques for developing solutions are TPN and Brainstorming.

TPN analysis
TPN Analysis is the process of deciding whether or not you have Total, Partial, or No control over a situation. It can be done every time a problem arises or as you are weeding through a list of problems.

This technique allows you to decide which problems you can actually do something about. The focus is therefore on the span of control and there is a need for realism to be applied.  The methodology for TPN analysis is straightforward:

  •  Determine your problems
  • For each problem, decide whether your span of control over it is

T – Total
P- Partial
N – None

This forces you to look only at the problems where you can have an impact. Once you have determined which problems you can control, a good technique for coming up with solutions is Brainstorming.

Rules for Brainstorming

  • Have a strict rotation to involve everyone
  • Allow people to pass their turn
  • No discussion
  • No criticism
  • No evaluation/editing of ideas
  • Capture everything in a visible format
  • Number the ideas as they emerge
  • Go into a free flow mode towards the end

Brainstorming is the process of gathering a group of trusted advisors to help you identify the root cause of a problem and throw out ideas for solutions. A trusted advisor could friends, family, other business owners, really anyone whom you trust.

During your brainstorming session you will:

  •  Create a list of problems
  • Identify theories of why the problem exists
  • Identify the root cause
  • Share ideas
  • Define solutions 

Brainstorming gives you an opportunity to get different views and opinions from those who are not as closely related to the problem. If done properly, it can spark creativity and provide options that you may never have thought of. 

At the end of your brainstorming session, you should have a list of possible solutions. Your next step is to pick the best solution, implement it, and monitor for effectiveness. 

Implementing the solution
Once the solution has been identified, the implementation must be planned. Metrics to determine the extent of the success or failure of the solution need to be set. 

  • A suitable measurement system needs to be set up
  • Analysis of the metrics needs to be established in advance
  • If the metrics show a failure then action needs to be taken to realign the effort

This process can be managed through the Plan, Do, Check, & Act cycle (PDCA).

  • Plan – Plan the implementation and define the metrics 
  • Do – Start the implementation process
  • Check – Check the implementation results against target
  • Act – If the implementation results are off target then act so as to realign the effort.

The PDCA cycle can be used as tool to bring discipline into the implementation and make sure that the results obtained are compared with those expected and any deviation leads to a re-evaluation. The goal is for continuous improvement as shown by achieving the expected results.

Why We Sometimes Can’t Fix the Root Cause

Poor Problem Solving Skills

  • Due to lack of training
  • Capability of the personnel involved even after training
  • No emphasis put on problem solving as a critical business skill in the organization

Lack of Focus

  • Insufficient focus on the problem at hand leading to non-completion
  • Too many problems being tackled at once
  • Activity centered on problems that affect non-critical business areas, thereby devaluing the problem solving activity

Lack of Resources

  • Information not available or accessible
  • No personnel released to work on problem solving teams
  • Little or no co-operation
  • No support from senior levels

Non-implementable solutions

Solutions are not implementable due to

  • Resistance to change
  • Cost
  • Political issues
  • Capability of personnel
  • Time requirements
  • Wrong solutions generated

Understanding where or why we are making excuses is the first step to solving most of our problems! Once we move past the excuses we can get to the root cause of the problems and use the tools we have to find solutions!


Getting to the Root; The Bottom Line to Solving Problems – part 1

Tips and Tools“Julia, you are always saying WHY, WHY, WHY, WHY, WHY! What is so important about why?”

All businesses have problems. The problems in a small business are unique for many different reasons. One being we wear so many different hats that problems tend to be pushed aside to be dealt with later. Pushing them aside leads to small problems becoming big expensive problems. This is why it’s important that we learn to tackle the problems quickly and effectively by getting to the root cause and implementing a proper solution.

What is a Problem?

A problem is a deviation from acceptable performance.

There can always be a gap between what is actually happening and what is supposed to be happening. By solving the problem that is causing the issue we will close the performance gap.

Why Solve Problems?
Where problems exist but remain unsolved the following can occur:

  • Demotivation of staff/self
  • Loss of customers
  • Waste of resources
  • Reduction of profit
  • Compromised growth/survival potential

Solving a problem effectively leads to:

  • Increased productivity
  • Increased enjoyment at work
  • Less stress
  • Improved quality
  • Improved efficiency

Every business has problems.  Problems are just opportunities to make improvements, forcing us to make necessary changes that will eventually show up on the bottom line. To find an acceptable solution to a problem we must first identify the root cause of the problem.

Symptoms are usually the visible manifestation of the problem and because they are visible they can attract attention.  In many organizations, effort is often spent eradicating symptoms of a problem, however the unseen parts of the problem – the root cause, is still there needing attention.

Types of Problems
Each problem category has its own peculiarities that must be taken into consideration when tackling them.
Problems can be broadly grouped into 3 categories:

  • People problems
    These may be difficult to resolve because people are not totally logical and emotions can play a part.  Plus no two people are alike, and what works for one will not work for another.
  • Process problems
    Processes are in place to ensure that everything happens as it should, every time, and by everybody. Usually people are a key element of processes. This adds another level of complexity to system problems.
  • System problems
    Systems are used to execute the process.  These cover mechanical, electrical, electronic, or informational. These problems are usually logical but complex and requiring a high level of technical knowledge.

For the small business, most problems are going to fall under the People and Process categories.

Identifying the Root Cause

To get to the real cause of your problem, you must dig down past your assumptions and excuses.  For example, many small business owners blame decrease profits on lack of sales due to a poor economy.  In reality, the economy doesn’t dictate “if” we do business, it dictates “how” we do business.  In this example, our decrease profits are due to our failure to adjust our business model and control our expenses.

There are many techniques available to help you determine your root cause. We suggest a few simple approaches.

  • The 5 W’s
  • The 5 Why’s
  • Cause and Effect Analysis

The 5 W’s

This is a simple technique that allows you to dig into the problem by asking:

  • What
  • Where
  • When
  • Who
  • Why

You may also ask How.  This technique gets you to dig into the problem in more detail so that all available information can be gathered.

  1. What: We are over budget on expenses.
  2. Where: We are over budget on Travel/Entertainment/Meals
  3. When: Month/Quarterly (the month of May)
  4. Who: Me
  5. Why: Went to multiple unplanned Networking events

The 5 Why’s

This is another simple technique that allows you to strip away layers from the problem and tackle root cause. This technique can be used alone or in conjunction with the 5 W’s.

  • Ask why the problem occurred
  • Get an answer and ask why it is so
  • Do this 5 times to reach a depth of 5 layers of causes.

Depending on the problem, you may not need to do this 5 times. This method begins to give robust information beyond the third Why.

We’re over budget:

  1. Why? Sub-contract labor was over budget
  2. Why was sub-contract labor over? Sub-contractor double-billed us
  3. Why we were double billed? It wasn’t a double bill, labor hours for 2 months was actually billed in 1 month.
  4. Why were we billed incorrectly? We failed to make a change order for extra labor hours.
  5. Why did we not make the change order? Bookkeeper failed to enter job costing.

So the root cause of our problem is a training issue with the bookkeeper.

Cause & Effect Analysis
Our third simple technique forces you to focus on possible causes of a problem. Once you identify possible causes of a problem you can analyze each to get to the root cause.  You may find simple solutions or links several problems to one root cause.

  • Identify all possible causes of the problem
  • Write them on Post-it stickers
  • Begin to analyze and cluster the potential causes
  • Analyze for root cause
  • Test the reality of each cause

Benefits are:   

  • Focus is on the cause
  • Different perspectives emerge
  • Allows linkages to be established

Now that you have identified the root cause of the problem, you must develop and implement a solution. And the rest of the Root Cause story is…until next time!

Click here for part 2

Managing by the Numbers

Empty Red Toolbox for Your Copy or Message Blank Copyspace“Julia, how does managing by the numbers help the bottom line?”

Every business needs a spending plan that looks at the money that must be spent relative to the money expected to come in. This leads us to a business description of a budget: A projection of both income and expenses for a coming time period. No business venture should ever proceed without planning. A budget is a critical part of planning.

Your budget is the first step in managing by the numbers. A budget is a spending plan. Your company’s budget is a look into the near future–a way to predict money that will be available to spend and what it will be spent on. This might sound easy, but that’s not always the case because there’s no way to know exactly what will happen to your business in the coming year. Managing your business by the numbers each month will help you react quickly in response to sales forecasts that were not realized.  There can be many reasons for a dip in expected sales. The key is to respond with a reduction in expenses and of course evaluating why the sales goals were not met.  Were the goals reasonable? Were there unexpected challenges that are atypical? Does there need to be an adjustment to the forecast of sales for future months? These are all questions whose answers could change what you forecast in expected expenses.

There are generally three types of budgets a business owner can and should establish.

  1. A cash flow budget. This type of budget specifically details the amount of cash that is collected—usually monthly, but sometimes weekly. The cash flow budget accurately lists specific details of the cash sources and amounts that a business receives and distributes. A well-documented cash flow budget will enable an entrepreneur to build and maintain the cash reserves needed for future growth.
  2. An operating budget is a projection of business activity for the coming year, how much we expect to produce.  It anticipates and predicts the revenue and expenses for a company for the year. An operational budget is perhaps, the most common type of budget used and what we will discuss.
  3. The capital budget places a value on the equipment that is needed in order to grow the business and boost revenues to the next level. Perhaps the importance of the capital budget is to assess how much it will cost to implement new procedures and equipment in order to create a new product or expanded service for the business.

Where to start when creating an operation budget:

In order to create and analyze a budget effectively, a business owner must clearly define a vision and set goals for the company. Ask yourself where you want your company to be in two, four or six years. How do you want the company to expand—by adding more staff, equipment, products or services? Perhaps you want to manage more efficiently by controlling expenses while keeping revenue constant. All are very important questions you should ask yourself before starting a budget.

Consider these steps when preparing an annual budget:

  1. Examine the vision of your company
  2. Review last year’s budget vs actuals
  3. Project your Revenue
  4. Project your Expenses
  5. Create your budget—income and expenses
  6. Review the budget and determine if it’s attainable, sleep on it.
  7. Compare and review your budget regularly, at minimum monthly

Some practical rules for creating and monitoring an operation budget:

  • Always charge expenses to the activity incurring them in the Costs of Goods Accounts.
  • Place every item of expense under someone’s direct control.
  • Have those who are responsible for an expense budget help prepare it.
  • Don’t hold people responsible for expenses they don’t personally control.
  • Don’t try to carry expense-budget funds over to the next period.
  • Don’t attempt to move funds between capital and operating budgets.
  • Require some level of approval for all expenditures.
  • It’s important to track the money going into each expense category as well as how much is spent altogether, so a breakdown of the expenses charged to any activity is essential.
  • A budget can’t be prepared properly right before the new period starts. Past costs adjusted for whatever is known about the coming period are some of the best predictors of future costs. With that in mind, you should gather information that will be used in preparing for the next period throughout the present period.

How does a budget help the bottom line?

As a small business owner, one of the most important tools you have in your tool box is a budget.  It should be done annually—and monitored on a regular basis. You must establish an annual budget and deal with it every day. Monitoring your actual financial performance against your financial goals is a pivotal part of entrepreneurship and the health of your company.

Unfortunately, budgets are prepared annually and often are not reviewed until it’s time to prepare a new one. However, by this time, it might be too late to revamp or strategize to meet your goals. Managing by the numbers simply means monitoring financial reports on a consistent basis and responding appropriately when goals are not met. Developing and monitoring an annual budget on a consistent basis will ultimately help a business to show a profit. For example, a well-planned and carefully executed budget will help an entrepreneur:

  • Predict sales
  • Control costs
  • Reduce spending
  • Estimate production costs
  • Set specific goals for payroll and other costs
  • Pre-plan profit!

It’s okay to have a budget that may prove to be a challenge, but don’t be unrealistic and set financial goals that you will not be able to achieve. Learn to pre-plan profit and protect the bottom line versus waiting until the end of the year to see what is left!



Putting more $$ in your Pocket!

Empty Red Toolbox for Your Copy or Message Blank Copyspace“Julia, my sales have increased so why haven’t my profits?”

A profitable business begins with understanding what it takes to be profitable. Many business owners’ will focus on increasing sales and not on controlling expenses. The fastest path to profit is controlling expenses. If you are not paying attention to the business-side of your business, you are not as profitable as you could be. Remember the six business functions: Operations, Marketing and Communications, Sales, Administration, Human Resources, and Finance and Accounting all; play a role in the profitability of the company.

Profitability is simply a company’s ability to make a profit.  It is a measure of success that a company is meeting the financial goals; it is the principal objective.  Profit is the amount left over when all financial obligations have been met by the company, not the balance showing in the check book.

Top Ten Reasons Companies Are Not Profitable

There are hundreds of reasons businesses fail.  A business without a positive profit margin will systematically put itself out of business.  Pick up any business book and there are chapters filled with reasons for companies not to succeed. Lack of profitability is the number one reason businesses fail. A company that is not profitable cannot remain in business. The following are the top ten that we see at Stanford.

  1. Poor Planning – Planning is critical. If you don’t know where you are going, how do you know you got there?  Many business owners will start with a business plan to get assistance from a bank or investor only to let the rest of the plan gather dust on a shelf.  Without consistent planning you run the risk of failing to meet not only financial goals but marketing, sales, and operational goals. Business planning should be done each year and defined measurements for success should be set for all company goals.  If you are not meeting these goals you are running the risk of not meeting a healthy profit margin, the whole reason you are in business.
  2. Out-Of-Control Growth – Growth is something we all dream of! It is the ultimate reward for hard work.  If a business does not carefully control growth then it can be the beginning to the end. A well run business develops a good working model before opening new markets or adding more profit centers. Growing without planning and control can cause devastation to the company. Sometimes, less is more. Protecting profit is the key to positioning for growth.
  3. Poor Accounting Methods – Not knowing enough about the “books” leaves business owners not in control and in a constant state of confusion. Many have an elementary approach to business acounting and say, “I only want to know the bottom line.” They forget controling everything above the net profit on a profit and loss statement is the most important part of managing by the numbers. The profit and loss statement will talk to you- you need to learn how to listen!  Many hire an accountant or a CPA to go over the books once a year in order to file income tax statements correctly. This does not produce a ture complete picture of the business. Usually, there are uncontrolled costs, spending, and profit leaks. That is why the statistics for business failures are so high for small and medium-sized businesses. People who use accurate financial reports to make their business decisions seldom fail.  A profitable business rarely fails. The “books” are supposed to provide management with accurate, pertinent, up-to-date information that will guide the owner in running the business profitably.
  4. Uncontrolled Expenses – Now more than ever, lean companies are at an advantage. Controlling expenses is the fastest path to increasing profitability. A business that is profitable in a down economy will thrive in a healthy economy. Many business owners will ponder over falling revenue numbers too long before adjusting business expenses.  If you manage expenses as a percent of revenue you will continue to manage profitability! The economy should change how you do business not if you do business.
  5. Inaccurate Job Costing – Inaccurate job costing compromises your profit potential. Failure to account for all costs creates waste and low profit margins. Once you have created an accurate estimate, you must also track changes that add expenses during the project or you will run the risk of not identifying all costs associated with the job, which in turn affects the profit of the job. Out of control costs or a lack of a cost control system has a negative impact on working capital, creates improper product pricing, and causes unfavorable variances resulting in high costs and low profit margins.
  6. Poor Administrative Procedures – As a business grows, you will start to need help tackling each area of the business. Without properly documented administrative procedures, the transition to having administrative staff can be bumpy. When things are not going as they should, some will say, “Tomorrow, I have to get organized.” Without knowing it the business owner is really saying “I have to put administrative procedures in place so I can function as a productive and profitable business”! Failing to identify administrative inefficiencies will keep a business from controling cost and increasing profits.
  7. No Operating Policy and Procedures – The lack of operating policy and procedures in a company, no matter the size, is the root of all evil! Your policy and procedures define what you do and how you do it.  The policy is the “Why” and the procedure is the “How”. It is how you build a strong foundation for the business.  Without this structure you will lack consistency and quality.  A hap-hazard approach is a breeding ground for profit leaks which drain the profit right out of the business.
  8. Poor Management Practices – This translates into owners who cannot get out of their own way. You know them. They may be stubborn, afraid to make decisions because they may not be the right decisions, or to avoid conflict. They may be a perfectionist, greedy, or just insecure. Many owners recognize the problems but continue to make the same mistakes over and over, yet expecting a different result. Many owners lack focus, vision, planning, standards and everything else that goes into good management.
  9. Low Productivity – Every minute an employee is idle, the cost comes out of the profit dollar. Every minute of idle machine time, the cost comes out of the profit dollar. Every minute the materials or goods are not in motion, the cost comes out of the profit dollar. Low productivity = low profit. Most companies have the ability for higher productivity without adding more people. Planning and schedule management alone would increase the bottom line.
  10. Lack of Personnel Evaluation and Fair Compensation – Few business people are aware of the cost of inadequate supervision. Lack of personnel evaluations and fair compensation leads to low moral, and dissatisfied employees leads to turnover. The costs of replacing qualified personnel who quit, finding and training the replacement, and the dissatisfaction of customers are not shown on the P & L. Additional costs include wasted goods and materials and a decrease in productivity.There have been many studies on the needs and wants of employees. These studies have shown that knowing what is expected of them, having the tools they need to do the job, and being shown respect are just as important as pay. In fact, pay is often down on the list.  A company who meets the needs of the staff and has a fair compensation builds loyalty which, in itself, improves the bottom line.

Profit Is Not A Bad Word

If you are not in business to make a profit then you have to ask yourself why you are in business at all. How long can you discount or give a product or service away before you have de-valued that product or service? It is very common for small business owners to judge their success on the balance in the check book or the end of year sales volume.  It is neither.

Profit can only be defined as the difference between revenue and expenses.  At Stanford, we prefer to teach our clients that profit is a predefined expense.

Revenue – Pre-Determined Profit = Controlled Expenses 

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