CAPITAL IDEAS: Lunchin’ and learnin’ with local titansMore Info
Dalton — Want your boss to give you a raise? Or are you the boss and want a raise yourself? Simple—identify a problem to be able to solve it.
Last week my firm hosted a group of business owners for a lunch-and-learn event. We had planned to provide both the luncheon and the learning, but I came away with an education myself. The intended hour-long presentation ended up being two hours of intense and open conversation. I was impressed with the level of vulnerability that was shared in discussing the challenges these local business leaders faced. The following are the biggest business problems they told me about.
At some point most business owners have been put in a position where they weren’t sure how they were going to make payroll. Personally, I’ve been there; I had to dip into personal savings to float us until receivables were collected.
Generally, this is the easiest problem to understand but the hardest to improve. To begin the process of improvement, you’ve got to know your numbers: 12-month trailing revenue, gross profit margin and your expenses as a percent of gross profit (not as a percent of sales, because you pay your bills with gross profit, not with revenue). Revenue is vanity; profitability is sanity.
When you talk to business owners, they don’t measure their success in what’s to come, they measure it in—what? That’s right: Years. That’s nice, but you know who else was around for years? Woolworth. And Pan Am. And England Brothers.
A long economic boom has made us complacent and content with our mere existence as opposed to grabbing larger market share by opening new service lines or catering to new demographics.
The Switzerland structure
Switzerland is known for its independence. And business owners and CEOs need independence from any one constituency, especially customers, employees and suppliers.
Customers: You can’t have an overconcentration among your customer set. Any one customer representing close to 10 percent of your sales is a big risk without the use of a contract.
Employees: If you’re overly reliant on any one employee, you put yourself at risk and you need to create a golden-handcuff scenario.
Suppliers: You need to be sure you can keep operating if one of your vendors no longer can supply you, or if they jack up the price on you and you need to switch quickly.
The valuation teeter-totter
You need to spend money to make money. A decade ago my firm had a profit margin of 47 percent and I was fixated on getting to that magical round number of 50 percent. But why? How important was it that my profit margin was high if it was based on a smaller amount of revenue? So we hired more people and introduced services (including helping business owners grow), and although our margin is about a third of what it used to be, now our revenue is closer to four times what it was. Spending money made us more profitable.
The hierarchy of recurring revenue
Too many business owners are chasing business (too hard), or relying on the “loyalty” of customers (too foolish). I previously wrote an article titled “Your Revenue Model Sucks,” which talks about this. It goes into it rather in-depth, so I’ll let you reference it if you’d like to take advantage of the concept. The gist of that article is that recurring revenue is the queen of revenue, and every business can get that rock-solid form of predictable revenue.
The monopoly of control
You’ve got to have a differentiation in your goods and services. The more you are like your competitors, either in reality or in perception, the more difficult it will be to set your prices. A differentiated proposition allows you to command a better price, which gives you a better margin, and the bigger your margin, the more you can invest back into your business. The more different you are, the more control you have over your pricing.
“My customers love me” is the constant mantra from every business owner. Accepting your definition of “love,” they also love your competition. And that’s not inherently a bad thing; you want your customers to love your industry. And it’s also not inherently bad that you’re giving up a slice of market share. It is, however, very bad that every business owner sings this mantra without being able to substantiate it with quantifiable metrics. You need to measure and benchmark your performance on the likelihood that your customers will recommend you because, honestly, you just don’t know—you only think you do.
Hub & spoke
This refers to how dependent your business is on you personally. We’re aware of how airlines use a hub & spoke system. For example, Delta’s hub is Atlanta. Delta will route flights from Atlanta to other airports and back to Atlanta. So if you live in Atlanta, you have your choice of direct flights. But if you are departing from Albany or Hartford, you’re probably getting a connecting flight. It’s not perfect, but it’s very efficient.
And owners do something similar, where they are actually proud of how their businesses wouldn’t be what they are if it weren’t for their presence, because everything has to be run through them. They’re the hub and the employees are the spokes. OK. Maybe you’re used to it enough so that it’s efficient. But ever been on a Delta flight when something goes wrong in Atlanta? Everything gets backed up, flights are cancelled and everything grinds to a halt. It’s a mess.
Solving these problems was another part of the conversation, of course. Getting to the specific solution for your company, whether you’re an owner, an aspiring one or just looking for that next promotion will first require recognizing that you have problems. My hope is that by listing the problems we discussed last week, you’ll recognize yours.
Allen Harris, the author of ‘Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire,’ is a Certified Value Growth Advisor and Certified Exit Planning Advisor for business owners. He is the owner of Berkshire Money Management in Dalton, managing investments of more than $400 million. His forecasts and opinions are purely his own. None of the information presented here should be construed as individualized investment advice, an endorsement of Berkshire Money Management or a solicitation to become a client of Berkshire Money Management. Direct inquiries to firstname.lastname@example.org.