Bob’s Business Breakthrough

Bob’s Business Breakthrough

Whenever I ask a business owner, let’s call him Bob, “What is your biggest challenge?”, they almost always answer, “I need more sales”.  When I ask, “Why they need more sales?”. Like Bob, they often respond, “Because I am not making enough money!”.

I then follow by asking how much more money they needed, they typically give me the dollar amount that the company fell short that month while reconciling their expenses versus their income.  Let’s just say in Bob’s example that the “fell short” number is $5,000.

It is not unusual for a business owner to know his deposits and the amount of money spent on bills to pay, a rudimentary cash flow process they go through each month because it is their money after all.  So, then I ask, “What is the margin on what you sell?”  It is a little disconcerting to have “Bob” struggle with understanding exactly what that means but I do take the time to break it down and explain the difference between margin and mark-up. That’s a topic for another day for this author. Anyway, the number they provide varies, but again, for this example let’s say Bob is making 20% on his product or service.

Then I explain to Bob that every business needs more sales.  Sales, as you know, are the very life-blood of any business.  “Bob, based on what you are telling me and the numbers you have given me, do you realize that to make $5,000 more each month that you need $25,000 in additional sales?  Knowing your business as you do, do you think that is realistic?” Bob scratches his head.

Bob tells me that he might be able to increase sales anywhere from $5,000 to $8,000, but $25,000 does sound unrealistic.  So, we do the math and learn that the increased sales might reduce the needed cash shortfall by $1,250 to $1,600 per month. I explain that when you increase sales you only enhance your bottom line by your margin.

In this case, every time Bob sells a dollar’s worth of product/service, he adds 20 cents to his bottom line.  But when you work on the saving expense side of the ledger 100% of every dollar saved drops directly to the bottom line. With some additional explanation, Bob follows my reasoning but still seems a bit dubious about exactly what to do next. So, we move on…

“Let me ask you Bob, is it easier to gain $5 of new sales or reduce your expenses by $1?,  because the effect on the bottom line is the same.” I can see that he is still thinking this through… More markers on white board ensues and we pursue some additional explanation.

“Bob, let’s say that you can do both…  You can reduce your expenses AND increase the sales.  You have then achieved the hat-trick in business because now you have reduced your break-even point so that you can start making money with less sales and become profitable earlier each month.” Although these concepts are vital to all businesses, the terminology often takes a small business owner off guard until each concept is broken down and they can see how it applies to their specific business.

It is not to say that small business owners aren’t intelligent. Quite the contrary. Small business owners are truly some of the most clever and insightful people I’ve ever met. Putting the language to application is challenging for anyone while gaining greater understanding of a new process.

Now I ask Bob what expenses he can reduce. We proceed to make a list.  Once the list is made, I explain to Bob which expenses are overhead and which ones are the cost of goods sold (GOGS), which are the expenses it takes to produce the product or service he is selling.

I show him that it is great to reduce overhead expenses.  Every time you reduce overhead by one dollar you add a dollar to the bottom line.  Then I try to show Bob that by reducing COGS or the cost or producing what he sells by one dollar, as he increases his sales, he will save far more than that one dollar.

Bob says, “I’m sorry, what?  How can a dollar be more than a dollar?”  So, we take deeper dive.

“Okay Bob, let me break that down for you.  Using the dollar as our basis, let’s say you build 100 widgets over the course of the month, and you can save one penny per widget by buying supplies better or working more efficiently.  At the end of the month how much did you add to your bottom line?” Bob replies, “100 widgets multiplied by one cent each equals $1.”

“Correct Bob, in this example, that is probably more like saving $20 to $30 per widget which would be $2,000 to $3,000 per month.  But let’s stick with the one cent / one dollar example, how much additional money would you drop to the bottom-line next month if you sold 150 widgets, not including the regular profit on the additional sales?” He promptly answers, “$1.50” and then he says, “Eureka, I’ve got it!” It’s always gratifying for me to see a business owner have an ”ah-ha” moment.

“So, as you can see Bob, additional sales are a good way to improve your bottom line, but decreasing overhead will enhance the profit faster, and reducing your COGS will not only enhance your bottom-line today but also reduce future costs as you grow.”

The concepts described, as mentioned earlier, are fundamental to improving the performance of a business, big or small. Applied to your own business, it becomes clear that the challenge of “needing more sales” is often a symptom of a much different problem. Not to be misunderstood, increasing sales in and of itself is challenging in any situation but coupled with managing costs, a true solution is born.

I concluded, “Let me leave you with this Bob. While it is true that a rising tide lifts all boats, wouldn’t it be smarter to build a boat that drafts in shallow waters so that you can fish while your competition is stuck in port?”