Business Basics 4: Turnover is ego - profit is everything

When I was about the same age as my children are now, my father became insolvent and lost the chain of television shops he had spent a decade building up. His business, as I now understand, was profitable – but the amount of money he was owed by debtors and the amount of money he owed his creditors balanced – and there was no way through the cashflow crisis that created. As a child I didn’t understand the reasons for the change in our circumstances but as I grew up I had two simple messages reinforced to me by my father: Turnover is good for your ego, but profit is everything. And Cashflow is king – but that is another Business basic.

During the dotcom boom, and several other booms, business sometimes seems to find a way round this dictum but, inexorable as gravity, in the end we all need to make a profit. Google did not make money for a long time, but now is a cash machine with the profits from online advertising. Skype on the other hand now seems to be worth a lot less than ebay paid for it.It is an easy thing to assume that if the turnover is there, then the profitability will follow – at a reasonable percentage. However the evidence is there that lots of businesses are what are uncharitably known as “busy fools” – working harder, bringing in more work, but not increasing profits at the same rate (or even at all). How long will Twitter and Spotify be able to go on growing without making a profit? Will they survive?

The holy grail of business is to increase volumes and margins at the same time, and it is the mantra of many sales managers (“sell more at higher prices”), which is instantly dismissed as impossible by many salesmen. It seems far easier to increase volumes by eating away at margins – which means we have to work harder to make the same money. That is the Red Queen’s Race in Alice in Wonderland, where we have to run just as fast as we can to stand still. In the end it is often unsustainable, and volumes drop without margins returning to previous levels and then the trouble starts.

As a consultant I am aware of some of my colleagues and competitors working for low rates that they hope will keep them busy. During the bad times, like the ones we have now in 2009, if the volume of work drops then they no longer able to sustain their business. If more profitable work becomes available they are often unable to take advantage because their time is fully booked with low value work. Clients buy our expertise, but they buy it in time based units. When it is gone, it is gone.

There are valid reasons for pushing for increased turnover – some Buyers will insist that a single contract is no more than 25% of a suppliers turnover, so the bigger the turnover the bigger the contract you can bid for. It can make the company seem more substantial that it is in reality. And as an owner or director it sounds great to define your business by the turnover - £1m, £10m, £100m. It is worth remembering that that is the way the big bankrupt companies described themselves, rather than their profitability - £10k, £20k or even nothing at all.

Of course, if you can maintain reasonable margins, then growth in turnover is excellent. We just have to remember that what we are trying to achieve is more profit, and that does not inevitably follow from increased turnover.

In the North we have a phrase about being all fur coat and no underwear… (to use the polite version). It is worthwhile for all of us to have a good look at the business we are gaining and checking that it really is generating a respectable profit (or that we have other reasons for taking it on), and that we are not just fooling ourselves into taking on more work for no gain.

Details of YCF Seminars 14th Oct 2009

PAWA at YCF 14th October 2009

I shall be presenting at the Yorkshire Chemical Focus Annual Conference on 14th October 2009 in Bradford. Time should be late afternoon, and the venue will be the Cedar Court Hotel at the top of the M606.

Procurex 2009

I shall be presenting a couple of sessions at Procurex Scotland 2009, the Scottish Procurement exhibition 28-29th October 2009. More details to follow.

Business Basics 3. What is in a name?

Large corporations put a lot of time and effort into branding - much of which seems to be a waste of time to those of us Luddites who still think that Snickers should be called Marathon bars. The change of name can sometimes seem bizarre, when as part of a restructuring a well known brand or company name is thrown away - as seemed to happen when the Virgin Megastores were briefly taken over and run as Zaavi. Whatever value there was in a music retail store in the days of instant downloads, surely a lot of it resided in the Virgin brand which has been around for 40 years.

So there is worth to company names. As part of a current project we are researching into suppliers to major sporting events. As part of the process we have to look a huge range of companies, and a few things very quickly come to mind. The first is that you can very tell many of the one man bands - they are called things like John Smith and Associates (there is at least one in the UK, and I am sure it is a very fine business). Nothing wrong with the name, but it can lead customers to think that you are small and not as capable as you might be.

Secondly, companies that have quite specific names describing what they do, often keep the name after they have expanded away from their original priority. That makes it difficult for new customers to recognise them. An example we came across was an agricultural business that now makes temporary buildings for many different applications - but the Agricultural in their name possibly puts people off.

Third thing is that having a common name can make it very difficult to distinguish you from similar sounding companies. Your Company Ltd. may be practically indistinguishable from Yourcompany, and Your Company International, and Your Company Trading etc. Often companies are stuck in the bind of having built up a reputation over years, but now being indistinguishable from lots of others with similar names. Likewise companys named after places are hard to find on Google.

Finally if you have made your company stand out by having an unusual spelling, or using X instead of ex- or something similar - you had better hope that your advertising is strong enough for your individual spelling to stick in the mind - otherwise people won't find it.

The easier it is for people to find your business the better. Tradition or a fancy name should not stick in the way of easy recognition on the internet.
Do we follow these rules? Well, we do have difficulties with people not knowing how to spell PAWA if they hear it rather than see it. Something we will think about as we grow.

Business Basics 2 : It's a numbers game

Another truism – the more customers you see, and the more you see your customers, the more successful you are likely to be. Obvious, but for many of us there can be a gap between what we know intellectually and what we believe in our hearts and do as a result. Outside of work life as well as inside.

Of course there is no guarantee that if you get in front of a lot of customers you will win business – your proposition could be so unappealing that no matter how many people you see no one will buy (though people will buy quite remarkable things – do you remember pet rocks?). But whatever your success rate, 99% or 1%, if you see more existing and potential clients more often you are likely to get more business. As said in the book Rainmaking, by Ford Harding, if my success rate is 10% and yours is 20%, I’ll still win more business than you if I see 21 customers and you only see 10.

Salesmen are used to thinking that every rejection moves them closer to a sale – the rest of us are less sanguine. It hurts when a client says no. When times are hard – like they are at the moment – and possible projects are being put on the shelf it takes a strong mental attitude to keep putting yourself in the way of rejection. And of course, when things get better we are all often too busy doing the work in hand to spend too much time seeing people other that existing clients.

As a consultancy we can talk ourselves out of business quite easily – our current project we nearly didn’t bid for on the grounds that the client knew us well but did not invite us in.. Naturally (and wrongly) we thought they did not want us. Another client I saw recently asked why we didn’t bid on a piece of work that was a follow up to an earlier project of ours – the answer was that we did not know about it. Talking more to our clients more often would have avoided both of the those problems.

In industries like Speciality Chemicals, the risks of a new supplier can be high – and so customers want to see consistent commitment to them as an account before taking a chance on change. Other times technical requirements change quite quickly, which an incumbent supplier might not notice but a hungry supplier on the outside might notice and take advantage of. And sometimes you get lucky and call straight after a need for your services has just arisen.

Of course call rate along guarantees nothing, but little and often (and for a long time) can be the way to get business.

Beat the Buyer - 14th October 2009

We are delighted to announce a new joint development with NBA4Business - a negotiation skills Workshop entitled "Beat the Buyer". This is part of a very reasonably priced series of 5 workshops which are being held at the award winning Shine Business Centre in Leeds - more details here.

Nick Bramley is an experienced saleman and trainer, and I will be bringing my expertise as a buyer to give people an opportunity to practice negotiation skills in a realistic setting. This is a unique opportunity to see negotiation from the viewpoints of both the Buyer and the Seller.

Prices for the workshop start at a very reasonable £75+VAT. Booking through NBA4Business .