Adam Stott is an entrepreneur, author, business coach and founder of Big Business Events.
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One of the things I love about business is perhaps something most people would not expect or share with me. It is the continual challenges business presents and none more so than the finances of starting or running a business. This is something I had to learn (and quickly), and it was explained to me in a way that made perfect sense.
ROI Investing
Every expense that goes out of the business should accomplish one of two things: It should make money (create income) or save money (maximize income). For example, there is a time and place for branding investments, but when cash flow is tight, that’s the wrong time. However, investing in sales makes money.
One of the common errors people make in business is to fixate on what something is going to cost, rather than what it will make. Look at every aspect of the business and analyze the numbers.
The key to all this is that it is not what it costs you, it is what it makes you or saves you.
Margin Testing
One thing that never changes in business is the need to balance the books; failing to do so can cause serious problems. I see this with my new clients who chase business in the early days of their enterprises. This brings bad clients and sparks a race to the bottom of pricing. They haven’t learned to say no, which means they end up being busy fools with clients who only come to them because they offer the cheapest deal.
Establish your minimum margins and stick to them. Cash flow and stock balance can improve, and the business can be on more solid ground.
This lesson applies to service industries as well. You must have a decent margin in your product or service to create wealth and success.
Let’s say we set up a business selling handbags. We buy them for $4 and sell them for $10, giving us a $6 margin.
However, that’s just a small part of the story because there are costs attached that could be significant. You have to get the handbag to you (delivery in). You also have to get the handbag out to the client (delivery out). You might have to run ads to sell the handbag in the first place, which are marketing fees. You can already see that the margin is being eroded. It could be that your margin becomes untenable if you have too many peripheral costs. That’s not to say there is no money in handbags. If Chanel sells one for $5,000, there is plenty left over for the extra costs because they have a higher margin and are selling at a higher ticket price.
All my years in business have led me to the conclusion that it is much easier to build a profitable business selling items that carry higher margins or higher ticket prices.
Based on the handbag example, to do $1 million in sales, your company has to sell 100,000 units at $10. Chanel only has to sell 200 units at $5,000. Your company has cash-flow issues because the extra costs are cutting into the margin; meanwhile, Chanel has bundles of cash because of its high margins. It’s much easier to find 200 wealthy clients than 100,000 budget clients.
Looking Forward: How To Predict The Future Of Business
Once you’ve set the margins, start looking forward and planning out what you want to achieve.
I wrote my first-ever budget, and this is now one of the first things I do with any business I run. I wouldn't dream of running a business without one.
Believe it or not, most businesses run for the entire year and then wait for the accountant to tell them if they did well or not. This is a big mistake and one you should avoid, because if you wait a year to find out you are not doing okay, it is too late to rectify the situation. Instead, a business owner needs to look forward and make sure they track the company's performance at least monthly to see if their objectives are being met.
It doesn’t matter how small your business is or if you’re just starting out, adopt these principles now. I wish I had done so earlier in my career. As soon as I brought these lessons on board and introduced them, they helped me achieve massive growth, success and increased income in a short time. If I can do it, then you can, too!
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