Small Business Webinar Series

Strengthen your business today

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Contents

INTRODUCTION ................................................................................................. 3

Learning objectives ............................................................................................. 3

Overview ............................................................................................................. 3

SECTION 1 – THE CUSTOMER ......................................................................... 5

The Changing World ....................................................................................... 5

Trend Blend .................................................................................................... 6

The future ............................................................................................................ 8

Generating more revenue ................................................................................... 8

Retaining your customers ................................................................................... 8

Customer stickiness ........................................................................................ 9

Staying in touch .............................................................................................. 9

Marketing ...................................................................................................... 10

Promotion ..................................................................................................... 10

Pricing ........................................................................................................... 11

Distribution .................................................................................................... 12

Key points ......................................................................................................... 13

SECTION 2 – STRATEGY ................................................................................ 14

Case Study– FitnessCentre .......................................................................... 14

Growth strategies .............................................................................................. 17

Existing products to a new market ................................................................ 17

New products to a new or existing market .................................................... 18

Strategic customer management ...................................................................... 19

Key points ......................................................................................................... 20

SECTION 3 – POLICY AND CASH .................................................................. 21

Cash flow management .................................................................................... 21

Receivables .................................................................................................. 22

Payables ....................................................................................................... 22

Inventory ....................................................................................................... 23

Supplier relationships .................................................................................... 23

Funding the working capital cycle and overall business growth .................... 24

Saving costs ...................................................................................................... 25

Operating costs ................................................................................................. 26

Manufacturing challenges ............................................................................. 26

The bottom line – Benchmark your business .................................................... 27

Key points ......................................................................................................... 28

SECTION 4 – PEOPLE ..................................................................................... 29

Employees ........................................................................................................ 29

Think before downsizing ............................................................................... 29

Increasing Productivity .................................................................................. 29

The Cost of Employees ................................................................................. 30

Staff Incentives ............................................................................................. 31

Alliances and partnerships ................................................................................ 32

Key points ......................................................................................................... 33

SECTION 5 – SYSTEMS .................................................................................. 34

Technology as a competitive advantage ........................................................... 34

Technology as a business cost ......................................................................... 35

Key points ......................................................................................................... 35

SECTION 6 – BUSINESS VALUE .................................................................... 36

Forecasts .......................................................................................................... 37

Financial risks ................................................................................................... 37

3

Introduction

Welcome to the Department of Tourism, Major Events, Small Business and the

Commonwealth Games - Small Business Webinar Series.

Our aim is to help you gain valuable knowledge and skills related to business

management to assist you in creating a better business; or growing your existing

business.

Learning objectives

The desired learning objectives are for you to:

think more creatively about the long term objectives of your business

determine how to translate those objectives into strategy

recognise the key role of cash in any short to medium term survival

strategy

develop plans for finding new customers and revenue enhancing existing

customers.

Overview

Throughout this webinar and workbook we will be looking at the role of the customer

in your business. The diagram below illustrates the way that a business must be

customer-centric in order to survive and grow.

We will first of all look at the changing needs and motivations of our target customer

and then develop strategies around servicing the specific customer niche that we

have chosen.

With these strategies in place, we will review the right blend of internal resources –

people, systems and technology to facilitate growth and profitability.

SYSTEM

PEOPLE

POLICY

STRATEGY

CUSTOMER

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Finally we will review appropriate forecasting and risk assessment tools for charting

your future course.

5

Section 1 – The customer

Understand your customer and anticipate change, rather than react to it.

One of the keys to a successful business is to have a great understanding of what your

customers want now, as well as what they are likely to require in the future. This may

seem like firing at a moving target, but astuteness mixed with inspiration, perspiration and

some luck will eventually help you meet that challenge.

Consider the changing needs of customers:

How is the world changing?

How are consumers reacting to this change?

How can your business adapt and stay ahead of change?

How will you become more efficient and create a point of difference?

Which customers should you keep … or let go?

How can you retain good customers without dropping your margins?

How will you attract new customers that you need and want?

Businesses that are proactive and take advantage of challenging market conditions to

improve their competitive position will be the real winners, however, they need to act

quickly and decisively; accelerating activities to yield short term gains and position them

well for long term success.

The Changing World

The world is changing more rapidly than ever before. New technologies and ideas are

spreading. Only twenty years ago most people had never heard of the internet - now

imagine business without it. More importantly, imagine if the changes in the next five

years were even more profound than in the last twenty. How would your business look?

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There are many of these big questions to ask. What will be the impact of the following?

environment challenges

globalisations of plagues and diseases

restrictions on alcohol and “junk” food

increasing wealth disparities between rich and poor people

continued growth of countries in the Asia/Pacific including China and India

increasing migration

evolution of cities

advances in genetic research

developments in nanotechnology

changes in life expectancy

exponential growth in innovations and inventions

changes to family life.

Trend Blend

Trend Blend 2009+ is a map of major trends for 2009 and beyond, across eleven

segments: global connectivity, anxiety, volatility, uncertainty, debt, power shift eastwards,

aging, GRIN (Genetics, Robotics, Information Technology and Nanotechnology)

technologies, digitalisation, climate change and sustainability.

The map shows some of the major trends in each of these segments, as well as the key

intersections between the trends. The 'multi-tentacled hydra' as it is referred to by its

creators is an effective way to present the numerous issues and trends that faced

businesses both in 2009 and today.

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Used with permission from TrendBlend 2009 (c) 2009, Richard Watson, What’s Next http://www.nowandnext.com

8

The future

Economies cycle up and down but global trends such as an aging population, the

interconnectivity brought about by the telecommunications and internet revolution, and the

environmental challenges we all face, will have significant impacts on the products and

services customers buy.

It is often said that there are four types of businesses:

1. Those that make things happen.

2. Those that watch things happen and respond.

3. Those that watch things happen and don’t respond.

4. Those who didn’t notice that anything had happened.

While the first type of business is an innovator and trailblazer, it may not necessarily be

the most successful in its field. Sometimes you can afford to sit back and watch others

make the first steps before deciding how you can improve on their efforts.

Naturally, strategies three and four are recipes for eventual disaster.

Generating more revenue

If you are looking at increasing the amount of revenue that your business can earn from

customers there are, simply speaking, three ways that this can be achieved.

1. finding more customers

2. increasing the amount of revenue derived from each sale, either by increasing

price or quantity sold

3. increasing the number of purchases that the customer makes over time.

Retaining your customers

The ultimate test is, of course, customer satisfaction. According to Philip Kotler, acquiring

new customers can cost 5 to 10 times more than the costs involved in satisfying and

retaining current customers.

More Revenue

More Customers

Greater value for each sale

Increase frequency

of sales

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Also, a 5% reduction in the customer defection rate can increase profits by 25 to 85%,

depending on the industry. Research shows that not only do loyal customers buy more

and buy more often, they also become strong advocates. The resulting word-of-mouth

‘advertising’ costs little and is often the most effective way of attracting new customers.

The average business loses between 10 and 30% of its customers each year, so all

businesses need to develop strategies to retain existing customers.

Some ideas for retaining your customers include:

The 80/20 Rule –

20% of your customers, products or services will provide 80% of your

business. To maximise profit - grow the profitable lines and customers. You

may need to stop servicing certain customers or remove certain product

lines or services so you can focus on ones that are profitable. Avoid having

your cash flow tied up with slow selling product lines, services that are

unprofitable to deliver and slow paying customers.

Customer stickiness

Customer stickiness is the concept of providing superior products or services that build

long term and loyal relationships with customers. As we now know it is more expensive to

look for a new customer than to retain an existing one. It is therefore worthwhile to

enhance the depth and quality of your products or services to ensure that customers stay

with you and profit from a lifetime of mutually beneficial exchanges.

Staying in touch

It is essential to let your customers know that you are out there – without bombarding

them.

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Remember:

listen carefully to all customers feedback – good and bad

If they don’t offer feedback – ask for it anyway!

know when your customers defect

keep your business at the top of your customers’ minds

deliver excellent customer service

do the unexpected

know your customers.

Marketing

Difficult times are never an excuse to cut marketing expenses, particularly if your

competitors are cutting theirs! It’s more an opportunity to evaluate and measure where

your marketing dollar is best spent. Much of the reason for the increasing shift to online

marketing is that it is far more measurable, but even with traditional marketing activities,

you must ensure that:

marketing service providers provide you with feedback on the impact of

components of your campaigns

you measure the correlation between marketing exposure and customer leads

yourself either by tracking enquiries or simply asking prospects how they heard

about you.

Key considerations for marketing in a slowdown include:

Promotion

With the growing amount of online purchasing and advertising, your promotional options

have never been greater. Concentrate on a few of the following that are most likely to put

you in contact with your target audience, and measure, measure, measure!

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Pricing

There are a number of ways to price a product or service.

Cost plus – adding on a percentage of the cost of the product to determine a

selling price.

Market based – the selling price is determined by research compiled from your

target market.

Skimming – setting the selling price high and sacrificing a high number of sales

for a high profit, thus ‘skimming’ the market.

Penetration pricing – setting the selling price low to gain customers’ interest

and to get a foot hold in the market.

In difficult times the temptation is always to discount price. Before actioning any price

decreases, you should consider the impact of discounting your price on your Gross

Margin over time.

(1) If your present margin is:

20% 30% 40% 50%

(2) and you reduce price by 10,20, or even 30%:

(3) then to produce the same gross revenue your sales volume must increase by:

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10% 100% 50% 33% 25%

20% - 200% 100% 67%

30% - - 300% 150%

If your business is operating on a 30% gross profit margin and introduces a 10% discount

sale (10% discount on gross revenue), the business would need to generate an additional

50% in sales to maintain that 30% profitability level.

If price discounting is inevitable in order to remain competitive, and there is nothing you

can add in terms of extra functionality, service or features to your product, then consider

some smart ways of offering cheaper products without making it look like you are simply

running with the herd, such as:

Two for one; is better than 50% off - it helps you clear stock faster. If you can

get away with buy one, get one half price; that’s even better!

‘4c a litre off’ - look at the queues at Shell/Woolworths petrol stations and

understand the power of a very small discount, provided it is handled cleverly!

Loyalty discounts - invitations to customer evenings, see our sale items before

the public do, 10% discount with our special card and other such ‘elitist’

marketing rapidly creates an aura of exclusivity that it’s hard for the consumer

not to appreciate.

Loss leaders or ‘door buster’ sales - the large retailers successfully use large

discounts on a select few items to get people into their stores.

Distribution

What is the most convenient and cost effective way that your customers can have access

to your products? How can you expose your target customers to your products even

though they may not be aware of them?

Consider reviewing both your on-line and off-line distribution strategy in the light of the

following:

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Key points

Know your customers

Knowing and understanding your customers’ needs is at the centre of every

successful business. Once you have this knowledge, you can use it to persuade

potential and existing customers that buying from you is in their best interests.

Understand customer trends

It's well worth keeping an eye on future developments in your customers' markets

and lives. Knowing the trends that are going to influence your customers helps you

to anticipate what they are going to need - and offer it to them as soon as they

need it.

Retain your existing customers

Your existing customers are among the most important assets of your business -

they have already chosen you instead of your competitors. Keeping their custom

costs far less than attracting new business, so it's worth taking steps to make sure

that they're satisfied with the service they receive.

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Section 2 – Strategy

There are three questions that all business owners should be asking themselves:

1. Where are we now?

2. Where do we want to go?

3. How do we get there?

The first question allows you to determine your current market position. The second

question is all about the goals and objectives of your business, and the third question is all

about the strategy – i.e. the plan of action designed to achieve those goals.

Case Study– FitnessCentre

FitnessCentre is a large independently owned gym located in a major city centre, close to

both the financial district and the main shopping centres. There are also a number of

luxury hotels in the vicinity.

The present owner acquired FitnessCentre in 2008. Recent difficult times had the

potential of affecting the gym badly as many of its clientele worked in the nearby financial

services district. He reasoned that retrenched workers would likely cease coming to the

gym, and this would have a material impact once their membership subscriptions are up

for renewal.

In order to reinvigorate FitnessCentre, the owner decided to undertake the following

campaigns to expand membership and increase usage of facilities:

target the city shoppers market at off peak times on Monday to Friday

emphasise weight loss/overall fitness

introduce a crèche and children’s activities to attract mothers of young children

remove joining fees, encourage shorter term memberships and offer ‘off peak’

annual memberships

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refurbish the upstairs area of the gym that is currently lying vacant by creating

wooden flooring for exercise classes and building in side rooms for one-on-one

health consultations

invest in an updated website and web store (eShop)

sell clothing for women specifically targeted at the 30+ age group

sell nutritional supplements

offer one-on-one therapies such as massage, chiropractor etc.

In addition to this, managers created a series of financial models that assessed how many

new members this would create and what the likely revenue impact would be.

Abridged section of a Forecasting Model 1

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This worksheet concentrates solely on the membership component of the forecasting

model. Other worksheets would include the other revenue and cost streams for casual

users, the web store and other ventures. The end point for the financial model is a

forecasted cash flow:

In general, the value of creating models such as these is:

They allow users to test a whole range of potential price and quantity

measures (membership price, number of new members, subscription

cancellation rates) in order to plan a particular financial outcome – growth,

breakeven, profitability.

They provide a means of setting meaningful targets and rewarding employees

for achieving goals.

They allow the user to adjust their forecasts over time as actual performance

numbers are known.

They form part of a credible business/financial plan that can be used for

internal resource planning, capital raising or lending.

Consider breaking down your business into its various components and create a financial

model that helps you understand your medium and longer term cash flows.

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Growth strategies

Once you know where your business is at and have identified the trends that are

impacting on you, you need to look at growth options that are suitable for your business.

These include:

bringing your existing products to a new market

developing new products for new or existing markets

Existing products to a new market

New markets may be alluring, whether you are considering increasing sales, improving

operational cost-effectiveness or introducing new international customers, however,

before deciding on an actual strategy or strategies, you must rigorously assess their cost

benefit. This is particularly so in the sales start-up phase where it will be expensive to

establish a brand and a suitable distribution channel in a market that may have little

awareness of your products and services.

Regardless of the strategy you decide upon, ask yourself, does it add value to the

business or does it simply just grow your top line revenue figures? Many businesses have

expanded into new markets on the understanding that new customers would embrace

their products in the same way that their existing customers have, but have failed to

assess their new cost structure.

Costs that are not significant in their home market – particularly those associated with

additional distribution channels, promotions for brand building, establishing a direct sales

force and establishing a retail presence may render the venture unprofitable.

Here are some of the issues you need to consider prior to expansion to new areas, and

states or exporting.

. • Existing products and services to

. • a new market

. • via marketing or client migration

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New products to a new or existing market

The development of new products and services normally involves a change in strategic

thinking. What is it that customers will be asking for 1, 2 or 5 years down the track and

how can we get our development teams active on this now?

Innovation, whilst fulfilling, can be incredibly challenging if you create something that you

only guessed the customers would need, and that they themselves didn’t know they

needed it until it appeared. Modern examples, such as the iPod proliferate, but Henry

Ford, the founder of the Ford Motor Company once joked that if he had asked consumers

what they wanted before he developed his business, they would have said a faster horse!

Here’s a more modern example of where understanding the customers’ needs paid

dividends for hotel chain Accor.

Case Study - Formule 1

Accor is a global leader in hotels with more than 4,000 hotels in 90 countries.

One of their most popular and successful brands is their budget brand, Formule 1.

. • New products and services to

. • new or existing market

. • via change in strategic direction

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Formule 1 sets the benchmark for budget hotel accommodation and is one of the fastest-

growing hotel brands in Australia. Formule 1 offers consistency and value, with hotels

located in key locations conveniently close to airports, transport and food outlets, making

it a good value choice for customers.

By looking at the features offered by other one and two star hotels and determining which

ones were the most valued by customers, the business developed a value curve which

indicated that the features most desired by customers were bed quality, hygiene and room

quietness. They then ensured that these attributes were a feature of all their Formule 1

hotel rooms.

Formule 1’s success illustrates how you can innovate on your product offering by

rethinking the existing rules, practices and traditions of your industry.

Strategic customer management

Strategic Customer Management involves reviewing your entire customer base by

segments and looking at the optimal methods of servicing and retaining them.

High Value Customer with Low Payment

Risk

High Value Customer with High Payment

Risk

Low Value Customer with Low Payment

Risk

Low Value Customer with High Payment

Risk

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Not all customers are ‘good’ customers and retaining the ones that are may require a

range of strategies in order to manage their loyalty. A low risk customer is one that orders

regularly and is less likely to stop ordering or go elsewhere. A high risk customer’s orders

may fluctuate wildly presenting inventory challenges to you, and are more likely to be less

loyal to your business.

Key points

Review your business’ performance

As a business owner you should stand back once in a while and review your

business' performance in terms of where you are now. Once you have a clear

indication of your strengths and weaknesses, you can start to plan for the next

phase and work on strategies to grow your business.

Make use of financial modelling

Financial modelling allows you to create a representation (model) of a strategic

business decision. It will help you to prepare your cashflow forecast, allowing you

to update your projections if there's a change in market trends or your business

fortunes. Planning for seasonal peaks and troughs is simplified and you can also

make "what if" calculations.

Choose an appropriate growth strategy

Once you know where your business is at and have identified the trends that are

impacting on you, you need to explore the various growth options that are

available. The key is choosing the growth option that best fits your business'

product or service.

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Section 3 – Policy and cash

Once you have formulated a strategic response to the changing marketplace, you then

have to develop and put in place the policies and actions most appropriate to service that

strategy. This section is all about developing the appropriate financial, inventory and

manufacturing policies to facilitate this.

Cash flow management

Your business must manage the working capital cycle carefully, particularly where there is

a long time lag between making your products and getting paid for them. The cycle is as

follows:

The working capital cycle describes capital (usually cash) as it moves through a business

it first flows from a business to pay for supplies, materials, finished goods inventory, and

wages to workers who produce goods and services. It then flows into a business as goods

and services are sold, and as new investment equity and loans are received. Each stage

Cash

Payments

(Raw Materials, Labour)

Goods Produced

Receipts

(Customer Payments)

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of this cycle consumes time. The more time the stages consume, the greater the demands

on working capital.

Receivables

Here is a typical process involved between receiving an order from a customer and

receiving payment.

ORDER - when the sales order is recorded

VALUE - when the sales order is fulfilled

INVOICE - when the invoice is issued

COLLECTION - when revenue is received from the customer.

Consider how long each of the processes takes in your business. How can they be

speeded up?

Typical methods of shortening this cycle include:

Payables

Accounts payable is the process of paying your suppliers, and, like accounts receivable,

there are plenty of opportunities to improve your cash flow and profitability here.

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Inventory

The ultimate key to success here is to ensure that you have sufficient stock in your

warehouse or retail premises to meet your customer’s needs, that you are not holding

onto unsold stock for long and that you can order and receive stock from supplier at just

the right time to achieve this. Remember that your value of stock you carry can be

magnified by slow moving items, which in turn ties up your cash in an unproductive way.

What can go wrong?

Cause Solving the problem

Too much stock over-optimistic demand projections

supplier offer “too good to refuse”

too many suppliers

improve inventory tracking and demand management systems

make allowances where the value of the inventory falls below its cost. The longer you leave it, the worse it gets!

Old/obsolete stock as above OR

unanticipated or unplanned suppliers product updates

Theft, shrinkage and spoilage

inadequate security, tracking or storage facilities

improve security, tracking and storage

Supplier relationships

The necessity to reduce inventories, have “just in time” supply and ensure that supplier

credit terms are fully utilised will often conflict with the objective of improving supplier

relations.

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One way of rationalising this is to segment alternative suppliers based on value (i.e. your

spend with each supplier) and risk (the number of other suppliers who can provide a same

or similar product)

RISK

Low High

VALUE

High LEVERAGE

Utilise market competition

PARTNERSHIP

Increase supplier value add

Low AUTOMATE

Standardise and reduce transaction costs

SUBSTITUTE

Reduce supplier uniqueness

(C) The Hackett Group

Similarly, your decision regarding whether to hold inventory can be segmented by the type

of inventory, where value depends on the value of that product and risk depends on the

consistency of customer’s historic demand.

RISK

Low High

VALUE

High MAKE TO STOCK

Maximise service

MAKE TO ORDER

Balance customer and internal lead times

Low DISTRIBUTORS

Consolidate demand

RATIONALISE

Eliminate or migrate

(C) The Hackett Group

Funding the working capital cycle and overall business growth

It may be advantageous for your cash flow to consider various forms of short term

external financing to assist you with acquiring inventory, capital equipment, production or

warehousing capability. Consider some of the following options for stretching your

working capital:

Equipment leases 100% finance, tax deductibility, and the option to own or upgrade are all advantages of leasing.

Factoring/debtor finance Financial institution providing you with cash in lieu of your unpaid invoices.

Inventory finance Financing the purchasing of stock – possibly even when it is not presold.

Production/warehouse finance Financial assistance with funding production costs or storage costs.

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In order to obtain either this finance or debt/overdraft facility you need to build a good

relationship with your existing financial institution.

Consider the financial institutions’ motivation in a competitive market for finance. They

need to both maximise their lending margins and minimise their risk exposure. The

competitive marketplace normally ensures reasonable rates in market sectors that the

institutions want to lend in. So how do institutions minimise their risk?

Financial institutions hate ‘shocks’ and encourage an open relationship with their clients.

This includes understanding the customer’s vision about where their business is heading,

the likely cash flow projections that the business has detailed and the risk that events may

occur that jeopardise those projections.

The more that you as a business owner can provide a financial institution the better they

can understand how to tailor a finance package for you.

Higher risk start-up and potentially high growth technology businesses may find debt

finance difficult to obtain. If your idea or vision is commercially strong with inbuilt

intellectual property or significant barriers to entry for competitors, you may consider

equity finance, where an investor (friends, family, business angels) take an ownership

stake in your business in return for funding.

Saving costs

Cost cutting is an inevitable part of readjusting to tougher times. It is however important

that the implications of cost savings are considered thoroughly in the light of the following

criteria:

Risks

Risks in executing these savings e.g. effect on brand, reputation, customer service.

Timing

Length of time taken to implement initiatives & realise financial benefits.

Revenue impact

Effect on revenue for changes in activities, resources and products affected by cost saving.

Costs to achieve savings

Additional costs incurred e.g. new technology platforms, severence costs, lease termination fees etc.

Likely cost savings

Estimate annual savings given risks & possibility of alternative outcomes.

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Imagine you were thinking of relocating your head office from a high rent city centre

location to an industrial complex on the outskirts of a town. You may enjoy a significant

cost reduction, but you would also need to consider the following:

Depending on the type of business you have there is a risk that your clients

would be less impressed by your change in location.

There may be costs incurred for additional travel if you and your sales

representatives want to visit customers and prospects.

There is a risk that you would be unable to sublet your existing premises for

the remaining time of your contracted tenancy.

There will be a cost in relocating any existing IT infrastructure, and the

possibility of downtime at the new location.

There is a risk of losing existing staff who do not wish to travel, which will result

in additional costs for recruiting and training new staff.

Operating costs

To reduce your operating costs, consider reviewing your operating processes, ensuring

that they can evolve to be the best in the industry and that they can see the business

through both booms and busts in the economic cycle.

Can any of the following assist you with increasing efficiency and/or reducing costs?

Where can work be conducted most cost effectively? Are there parts of your

operation that can be relocated to other (non CBD) offices, interstate or

overseas?

Can you shift in-house work to an external supplier based on their capabilities?

Do they have a superior cost structure compared to yours?

Can you outsource or use shared services? Internal telemarketing teams have

long been outsourced to call centres, while IT departments have been replaced

by a cloud environment which gives you the ability to scale up or scale down

usage and associated fees based on how much work you have and the

number of staff requiring access. Similarly, using the cloud environment will

reduce your capital expenditure on hardware and associated infrastructure and

servers.

Can you transform your entire way of doing business? How can you optimise

your workforce, processes and technology to provide the most productive and

efficient environment for your business?

Manufacturing challenges

A significant component of the costs involved in running a manufacturing business may be

attributed to the cost of production. In the short term, these costs are relatively inelastic

on the basis that you may have forward orders, requisitions with a multitude of suppliers,

component manufacturers and established production lines and QA systems.

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However in the medium term, you may have greater flexibility to determine the exact

shape of your manufacturing requirements, the degree to which you may consider

outsourcing and some opportunities for economies of scale through large runs, strategic

alliances etc.

Here are some of the issues worth considering:

The bottom line – Benchmark your business

Benchmarking your business and comparing financial ratios with your competitors or with

the industry at large is important in helping you understand how efficient your business is

and how you can effect changes in its operations.

Consider the following benchmarking information for fitness centres.

Indicator Average

Gross profit 88.49%

Wages & salaries 20.62%

Rent of premises 12.34%

Adverting & promotion 6.98%

Interest & Bank charges 5.20%

Repairs & maintenance 3.68%

Other occupancy costs 5.69%

Other depreciation, Lease & Hire Purchase 6.97%

Net profit 15.36%

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Percentage of revenue prepaid at time of use

40%

Trading hours per week 66

SOURCE: MAUS Business Systems

In the fitness centres example, the more profitable businesses had the following

characteristics:

were larger

had higher staff costs but higher levels of personal productivity

had higher gross profit margins, but slightly lower net profit margins

had better asset productivity

had more revenue from regular members.

Benchmarking information is available for most industries and the data will allow you to

make comparisons with what you are achieving in your own business.

Key points

Understand the importance of cash

A business can survive for a short time without sales or profits, but not without

cash. It is cash which pays the bills and allows trading to continue.

Manage your cash flow

Practical steps to managing a healthy cashflow include: reducing stock, minimising

costs, maximising sales volume and margins, recovering debt through invoice

discounting and factoring, renegotiating credit arrangements and selling off assets.

Monitor your financials

Monitor your actual performance against the budget and the cashflow forecast

regularly — at least once a month. Identify any problems and take immediate

action.

Benchmark your business

Benchmarking is a valuable way of improving your understanding of your business

performance and potential by making comparisons with other businesses.

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Section 4 – People

This section on people covers employees, stakeholders, shareholders, advisers and

potential strategic partners. We live in a networked world and the opportunity to grow

your business is very much dependent on forging the relationships required to back you

up.

Though the best run businesses always outperform the rest of the economy in normal

trading times, historically in a recession the difference is even more pronounced.

Employees

Think before downsizing

The rush to downsize may well be a case of throwing out the baby with the bathwater in

terms of:

cost of retrenchment/redundancy

value of skills lost

longer term damage to business

cost of retraining someone new to undertake the same job when the economy

recovers.

Increasing Productivity

Your efforts to increase productivity may result in you needing less employees. On the

other hand it may result in helping to create new profitable opportunities that you require

to maintain all of the specific skill sets that you have already built up.

Consider using some of the following strategies to increase productivity in your business:

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The Cost of Employees

Get a handle on the actual cost of maintaining your existing employee base. This is

important also if you are considering retrenching staff as there may be important post-

employment financial commitments, such as salaries owed, bonuses and commissions.

You will also need to consider:

Superannuation

Annual Leave

Long Service Leave

Cumulative sick leave

Termination benefits

Depending on how your business remunerates its employees there may also be share-

based obligations - such as shares owned, options etc.

The issue of how many staff you need is best answered by considering how best to

maintain or improve the quality of goods produced and the quality of services provided to

your targeted customer base. If you have a large number of customers with low risk of

migration to your competitors then for customer service you may need an information rich

website rather than dedicated service representatives.

Similarly with sales, consider your sales pipeline, also known as a sales tunnel or a sales

funnel.

When looking at obtaining a new customer, you need to consider a sales funnel for your

own business. How many initial contacts do you need to obtain one sale? What is the

cost of servicing those initial contacts (salesforce, presentations, proposals etc) in order to

make that sale?

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In this example, 250 initial prospects pipeline through to only 10 sales, but you must cost

in the resources used in making contact with all of those initial 250.

Staff Incentives

Increasingly, employees are being measured and incentivised based on their

performance. This has always been the case for sales people although the method of

targeting them on sales revenue generated is questionable, and as with all employees

should be based on contribution to overall business profitability or growth.

Performance based incentives may also apply to project staff for on-time delivery of

projects, production and warehouse staff for efficient scheduling and working capital

management, and to a whole host of other employees.

Incentives and performance goals should be designed to achieve the best results

possible. They must be constantly re-evaluated as there may be circumstances where

they can demotivate. This can occur if the sales person is not achieving goals or if the

maximum earn outs have already been achieved and the individual is squirreling away

some achievement for the next period!

Also you could consider shares or share options in the business via an ESOP (Employee

Share Ownership Program).

Finally, incentives need not be financial in nature. Employee care, recognition and the

opportunity for advancement may be as motivating, if not more so, than pure financial

incentives.

250 Cold Calls

100 Initial Discussions

50 Presentations

25 Evaluations

15 Negotiations

10 Sales

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Alliances and partnerships

The world doesn’t come looking for a better mousetrap, and the economy is a machine

that involves businesses acting together as well as competing (‘coopetition’ or

‘frenemies’). It’s very difficult to build a wholly self-sufficient business, so it makes sense

to assemble a group of businesses together that form a sustainable force.

Alliance opportunities enable:

These partnerships are entered into with businesses already operating in your market

space. If you do decide to enter into such a partnership, there is an eight stage process to

managing the relationship:

1 •Ask yourself, why partner with your target?

2 •What information can you find out about the target?

3 •What can you get out of the relationship?

4 •How far do you want the relationship to go?

5 •Why would your target be interested in you?

6 •How could you successfully negotiate with the target?

7 •How would you track and manage the success of the relationship?

8 •How could you get out of it if you needed to?

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Your thoughts on this may help you initiate relationships with businesses that previously

you may have been hostile to, on the basis of a win-win end game. The concept of

coopetition has been behind some of the most successful organisations in recent years.

Key points

Communicate with your staff

By communicating openly and honestly about your plans for your business,

including the impact on your workforce, you may be able to develop strategies

(e.g. part-time workers, job sharing, reduced working hours) which will allow you to

retain staff and work through a downturn.

Motivate your staff

You need to think about the effect tough or uncertain market conditions can have

on your staff. Morale can sink quickly and feelings of anxiety can spread when

people elsewhere are losing their jobs. As well as rewarding and recognising their

achievements, you need to set targets and monitor their performance.

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SECTION 5 – Systems

Look around most industries including your own. How much of the shift in the competitive

landscape in the last ten years has been enabled by innovative uses of technology? Who

are the most respected businesses in your industry and how do they use technology to

attract customers and keep them happy? How do the leading users of technology benefit

in their supply chain dealings? If you think you’ve seen drastic changes in the last ten

years, then look out for the next ten!

Technology as a competitive advantage

Excellence in information technology can drive real improvements in your business’s

bottom line. IT must deliver value to your business, rather than simply be a cost that

should be contained.

Consider how adopting of technology could assist you in creating a competitive

advantage.

How might customers find it easier to communicate with you, buy from you and

receive good service?

How might technology that facilitates information sharing assist you in dealing

with suppliers and distributors in your supply chain?

How might technology that brings together information that may currently be

available in a fragmented form within your business assist you with demand

and inventory planning?

Here are some examples of technology-based initiatives that you might consider. Review

the opportunity and potential value of these to your business. Also consider the potential

payback on such innovations.

Ecommerce - includes a website and web store along with web technologies

for transacting with suppliers and distributors.

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Customer Relationship Management (CRM) - includes sales force automation,

order management systems, online customer support and service and

e-marketing campaign management.

Accounting/Enterprise Resource Planning (ERP) - automated functionality

(often shared with supply chain partners) regarding shipping, purchasing,

inventory management, payroll and management accounting/forecasting.

Technology as a business cost

Information Technology costs can be one of the most significant operating costs of your

business. As you grow your business, consider the costs of some of the following:

Cloud solutions, including hardware, software and networking products for your

team

connectivity solutions with customers, suppliers, distributors etc

disaster recovery and contingency planning requirements

network and data security

Also consider the commercial costs for NOT investing in technology:

lost hours due to printer problems, network problems

loss of unsaved work and failure to back-up documents

inefficient processing power

computer downtime associated with inexpensive or inferior equipment

inefficient systems and double entry

poor document management and access, complicated systems or retrieval of

data.

Technology is THE most significant driver of business change over the last decade and

difficult times are only likely to exacerbate this further as both businesses and customers

seek to reduce the time and cost of doing business.

Key points

Use technology wisely

As IT becomes an increasingly important business tool for organisations of all

sizes, it is vital to ensure that your business gets the most out of any system it

introduces. In order to achieve this, you need to make sure that the IT system

you choose supports your business’ goals and adds value to them.

Use technology to do business better

All businesses need to keep a close eye on costs in order to maximise profits

and remain competitive. Technology can play a part in achieving this goal.

Even the simplest use of technology can dramatically improve your business'

productivity and efficiency eg, linking your systems with customers and

suppliers to improve productivity right through your supply chain.

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Section 6 – Business value

The end game, and much of the reason for why entrepreneurs own businesses,

is to increase the value of their business, as well as generating an income stream

for themselves.

Regardless of whether you wish to work in your business until you retire, pass it

on to your children, grow it and then float it as a listed business or sell it to the

highest bidder, much of your ‘working on, rather than in the business’ mindset

must be directed towards making the business a more valuable asset.

The value of your business is the price that a buyer will eventually pay for it. The

following chart illustrates the typical range of prices paid for businesses in each

industry by size of business, based on multiples of turnover.

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SOURCE: BizExchange Index March 2008 Quarter Results

The difference between the LOW and the HIGH value for each industry is based

on:

the profit margins and whether they can be improved upon

the stability of the business

its competitive advantage

the maturity of the industry

how reliant the business is on the current owner.

Forecasts

“You can analyse the past but you need to design the future. That

is the difference between suffering the future and enjoying it”

Edward de Bono

Financial risks

Businesses, particularly those who have borrowed in the past or who have

exposure to international price changes (import, export or sourcing of raw

materials) may have additional financial risks. Consider actions that you may

need to take in the following circumstances:

Type of risk Explanation Detail Mitigation

Liquidity Risk Insufficient funds to meet due to liabilities.

Borrowed funds not available at acceptable terms.

Loss of credit line from funder.

Maintain unused funding sources in view of factors such as future debt repayment, capital expenditure, seasonal fluctuations, potential acquisitions and contingencies

Interest Rate Risk

Movements in interest rates will affect financial performance by increasing interest expenses.

Include sensitivity analysis in your forecasts.

Use of pre-agreed fixed and locked in interest rates.

Offsetting the increases in interest paid in one part of business with interest received on another.

Use of swaps – exchanging a floating rate obligation for a fixed obligation.

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Foreign Exchange Risk

Risk that exchange rate to AUS dollars causes shareholder wealth to decline.

Risk that these movements make your business’s products or services uncompetitive internationally

Forward planning including buying forward currency

Other hedging against currency moves e.g. foreign currency bank accounts.

Commodity Price Risk

Risk that a change in the price of a commodity that is a key input / output of an organisations business will adversely affect financial performance.

Reducing reliance on specific commodities

Forward buying

Credit Risk Risk that the other party in a transaction will not be able to meet its financial obligations.

Could also be the consequence of international government directives and policies or a settlement delivery risk that destroys future business dealings

Assess counterparty risks prior to involvement. Use of prompt payments. Avoid creating an undue dependency of a limited number of suppliers, distributors or customers

Building a business into a marketable entity in itself is the end game from all of

the inspiration and perspiration that you the owner have ‘enjoyed’. By asking you

to consider your strategy, the processes you need to put in place, the risks in the

strategy and the way that you will mitigate those risks, we hope that this webinar

and accompanying workbook has helped you develop a vision for the future.