European Business Improvements

Entry Date: 020408

Congratulations, you've decided to go into business for yourself.

A friend of mine frequently tells me that there are only 168 hours in a week. Assuming that you want to sleep a little, relax a little and eat once in a while, you are limited to say, 75 hours available a week to work on your business. Realistically, this figure becomes more like 60 if you don't want to do some serious long-term health damage. Then you ask yourself why you want to work more hours than you did as an employee and you settle on about 40.

OK, this then is the ceiling. 40 hours paying yourself £25 per hour and you hit the princely sum of £1000 per week. Sounds great doesn't it? £50,000 a year! However, you aren't actually going to earn for the full 40 hours. Some of that time will be spent prospecting for business, some completing paperwork, some being an unpaid tax collector for HM government, etc. I usually reckon on about half the working week being an "earner". Therefore that £1000 becomes £500. Not so good now is it?

So you're working out your finances, looking to raise your income a little and no doubt you come up with a formula that looks very close to…

Selling Price = Costs + Profit

Therefore, if you increase your selling price, you'll have more profit, and be better off. Sorry, this is likely to get you into deep trouble. Unless you are selling something truly unique, your selling price will largely be determined by your competition; hence it is relatively fixed.

It is far wiser to look at the formula this way round…

Profit = Selling Price – Costs

Now you can clearly see that to maximise your profits, if the selling price is regarded as fixed, you must control those factors in your direct control (costs) with an iron rod.
Control all the costs that you can. Haggle with suppliers, shippers etc, get the very best deal that you possibly can. Only by driving these costs down, can you improve your profits.

By the way, don't forget scrap. As Deming once said, "Scrap doesn't come for free; we pay someone to make it." Find that person and stop him!

So, now you're up and running, a few small customers to hand, then you get one big customer come on board. He takes all you have to offer. You are so grateful; you've cracked it at last. Money in the bank! However, to service this one large customer, you let several smaller customers go. You have no choice; the big customer wants all that you can deliver. Then the unexpected happens. Your big customer squeezes you on cost. You have no other customers, so you have to accept, or the big guy will take his business elsewhere. Then he does anyway, and you're finished!

Think this can't happen? It does, all of the time. I have seen the above scenario played out over and over again.

You can protect yourself though. Firstly, never allow one customer to take more than 50% of your product or service. This way, they are never in the position of being able to call the shots and you remain in control.

Next, differentiate your product or service sufficiently to be able to charge a premium price for it. BMW and some perfume brands have been doing this for years. Remember, perception is reality for the customer.

Then, chase your debts rigorously. Often all it takes is a phone call. However, if the debt remains unpaid, stop further shipment. You can't afford to be at further risk. Take prompt recovery action. The sooner you act, the more likely you are to get your money, if your customer is in trouble. Once the other creditors find out, they'll all be chasing an ever-shrinking pot of money.

Finally, control those costs.

Get help if you need it, but seek help before the situation becomes dire!