I Want to Be in Business!

Recently I met a business owner who, upon finding out that I was a business consultant, wanted to meet and discuss how their business could benefit from working with me. The objective of the business was to produce a specialty item for sale in grocery stores. This was a home manufactured product and family members were the production and delivery team.

The business had been operating for a year and when I asked if it was profitable I got a suspicious answer. After some wrangling it was revealed that another family member (brother-in-law) did the books for the business but no monthly reports were provided until the end of the year when they discovered they were not making a profit.

I asked what their profit goals were and again received a weak answer. So I backed into the answer by asking what the shelf price of the product was and the cost to distribute it. Subtracting distribution costs from the shelf price left a small number to accommodate per unit production costs and also produce an operating margin. When I multiplied the budgeted margin times the annual volume I asked if this was a good result for their effort prior to covering overhead expenses. A got a very disappointed look.

The end result of the conversation was that they needed to reassess their reasons for being in business because the model as currently operating was not going to lead them toward a profitable experience. The passion and desire to be in business was apparent but they had no idea of what it took operate the business toward a profit goal.

What are some of the basic lessons from this experience that should have been addressed before business operations began?

• In addition to a business plan a financial model of the business should have been developed that would have allowed them to understand the sensitivity of the model to volume, distribution costs, etc. and the level of effort necessary to meet a minimum business goal.
• There was no regular reporting of financial information to understand what costs were being incurred compared to the revenue that they were generating.
• They engaged in a market where there were barriers to doing distribution themselves and or successfully negotiating more competitive distribution costs per unit that ultimately represented a significant part of the unit cost that they could not control.
• Be careful relying on family members for performing significant roles in your business particularly if it is not an important focus for them. Once assigned it is difficult to reorganize without creating hurt feelings and conflict in the family.

While this was a micro-company the issues that affected their success also occur in larger business endeavors. If you want to be in business do your due diligence and get outside input which will be difficult to take but it is better to get objective perspective on the issues that will affect your success before you start rather than after investing time and money to get the same input.

Win-Win Banking Relationships

Having a positive working relationship with your banking institution is critical in a turbulent economy. Having a good understanding of your banks lending policy is a given but there are additional factors that come into play when a loan is necessary. Factors that can make this process a Win-Win situation are: Honesty is at the top of the list. Fundamental to any lending relationship is trust. Whether lending hedge clippers to a neighbor or money to a customer, the lender needs to trust that the borrower will return the property / money in good order. If honesty is # 1, “no surprises” is a close second. Money was lent based on a set of circumstances. If these facts change, the lender needs to be kept informed in advance if possible. Consider the neighbor who says; “your hedge clippers? I can’t get it to you this weekend; my brother-in-law in Ohio has it. I am sure he will bring it along when he comes back to visit.” Good Surprises will not always be viewed as positive. “If management can miss what was happening by that much, could they also miss it in the other direction?” Keep in mind that every lender reports to someone who is generally less informed about your company. Even the bank President reports to a Board and to the Regulators.Keeping them informed protects them within their organization. Have a plan and do what you say. Being consistently overly optimistic will eventually compromise the trust relationship. Pay attention to the covenants in the loan agreement. Making payments on time is only part of what was agreed to. These covenants are in place to help the bank maintain its fiduciary responsibility to their depositors. Think how you would feel if your mother was the widow mentioned above. Be realistic on how you view rates. Think about how you respond to your low margin customers. Do you want your lender thinking about you in this way? Remember, a quarter point on a $250,000 loan costs an extra $625 per year. Compare that to the cost of being viewed as an unprofitable account. View the relationship as long-term. Consider the banks other services (home mortgages, investments, cash management, etc) if they can add value. If you are satisfied with your bank, refer them to others. In other words, increase your value to your bank. If the bank invites you to a social event. Go! Getting to know each other in a relaxed environment can often lead to better understanding. Reciprocate when possible. If you get in a tough cash bind, make sure you pay your payroll taxes. Without getting into a legal discussion, unpaid withholding taxes can jeopardize the lenders secured position. This is never a good thing. These are good points for us as banking customers to keep in mind as we managed our relationship with our respective banks. Bankers can also foster better bank / customer relationships that we should look for (and expect) in determining if a banking relationship should begin or continue. Listen! Be consistent. If things are changing on your end of the relationship, remember the “no surprise rule”. Know your customer. Understand their business. Be aware of the challenges and opportunities. Serve as a resource. Introduce the company to successful new ideas or services. You see a broad cross section of the marketplace that your customer may not be aware of. Most banks today have a catchy slogan. “They are all good”. Live your slogan. Take the mystery out of your lending process. Recommend your other services only when they can add real value. If the value isn’t clear, remember the “trust relationship”. About rates, be fair. You deserve to make a profit, but again remember the trust relationship. Introduce the customer to your back up person. It’s never positive if that introduction happens in a transition meeting. Keep the client’s interest in mind on the depository side of the relationship not just the borrowing side. “No, but have you considered…” is often a better answer. A banking relationship is an important and invaluable asset which both sides need to invest time and energy to manage well. Don't just invest in it when you need it! Click here for the complete article from Lauber & Company.

Is Your Line of Business Profitable?

Anyone who owns or runs a business knows if they are profitable or not. They look at the P/L at the end of the month and to see if the bean counters show that all revenue exceeds all expenses for the period producing "earnings". This may not be the true profitability of your "line of business" or LOB. The question is compounded if you happen to have more than one LOB.

I have often come across companies that report profits but upon closer examination the profits reported differ from what the LOB's produce. Measuring the profitability of a LOB aligns all of the products, services and overhead for related products that serve a particular industry or customer base. Provided the accounting esteem collects the appropriate data on material, labor and overhead cost it is then possible to measure the LOB profitability.

In a single LOB company it is not uncommon for administrative overhead or corporate overhead to include more cost than is really used by the LOB. This may be due to general inefficiency or intentional misuse by senior leadership or owner for services that are not really related to the LOB. Consequently the company may be profitable with the LOB bearing a heavy overhead allocation or worse the company may be unprofitable when the LOB is profitable. The risk here is that the LOB may be starved of critical resources so that overhead services can be continued.

An extreme example of this was a multi LOB business model where two of the lines were producing LOB profit in excess of 10% while the third and most capital intensive had a loss of 15%. The consolidated profit was 5% and termed "a good profit" by the ownership. Upon further examination the third, capital intensive, LOB had significant issues without he pricing model of work performed, an understanding of what the loading factor of the equipment should be to be profitable, and when it was "profitable" to add additional equipment to the business. These "weaknesses" would not have been revealed had the LOB profitability of a profitable company's not investigated.

Make sure your LOB's are profitable and that your consolidated profit is the accumulated totals of those profits!!