BizEnrich Team

For the past eighteen months I have been a charter member of BizEnrich, a membership organization of independent business experts. In addition to networking and learning, members of BizEnrich collaborate on projects to benefit our mutual clients and the business community. 

On September 10, 2010, twenty business experts from BizEnrich attended Fiberlay Expo, a customer appreciation expo hosted by Fiberlay, a leading distributor of composite, casting and related products servicing a multitude of industries both domestically and internationally.  At the event, customers got to showcase their creations and interact with Fiberlay team members, as well as Fiberlay suppliers. BizEnrich was invited by Fiberlay to conduct a series of four business training sessions and enrich the business acumen of Fiberlay customers.

“Take Charge of Your Sales Team”

Dave Mantel, Seica Systems, took us through a sales process that qualifies prospects quickly by identifying those who are likely to say no. The slide above explains the process that is typical with prospects. In his experience the top salespeople work quickly through these phases and instead focus on those who are likely to buy something. A key part of that process is to understand what problem the prospect is trying to solve and match your products and services those needs.

“Creating a Collaborative Enterprise”

Bob Nitschke, Arago Partners, presented some concepts from his book, “Creating a Collaborative Enterprise”. Bob outlined collaborative enterprises as those who focus on communication, cooperation and commitment.  The three “C’s” form the foundation for stakeholders: the workforce, customers, owners, suppliers, community, governments and yes, competitors of the collaborative enterprise. Bob contends that collaborative enterprises are significantly more successful in today’s global market than their competitors. Learn more at www.creatingacollaborativeenterprise.com.

“Creating Business Efficiencies”

Pete DiSantis, Peter DiSantis Consulting Associates, covered his approach to driving efficiencies into organizations of all sizes: Plan-Do-Check-Act. This four step problem solving process: find the real problem, implement the corrective plan, check that the plan was implemented and analyze the difference between the plan and what was implemented. Then repeat.

“Leading Strategies for the Recovery”

Ron Kranz, Beyond the Benchmark, helps business owners think outside the box partly by asking questions that make them think. Part of his presentation covered the economic cycle of four phases: Advancing, Best, Caution, Danger, returning to Advancing again. Ron’s feeling is our economy is in the advancing stage now and this is the period to make key investments in people and in other parts of the business to be in position to take advancing of the Advancing phase.

Well done to the four BizEnrich presenters.

I have worked on the implementation of over 150 enterprise resource planning (ERP) systems around the country and in that group I think I worked with only a couple of companies that might be considered Collaborative Enterprises (CE). And the more these companies leaned toward being a CE the more successful they were in the ERP implementation.

One in particular comes to mind. This company had a factory that configured products to customer orders and manufactured products for stock. They had a retail store and a catalog store (these days an online store). This required the deployment of 3 different systems all of them integrated, a complicated task.

The day of the implementation kickoff meeting the President gathered the team of about 10 people and told them why they had been selected (they were each key players in their departments) and what the objectives were (bring the company systems into the 20^th Century) and why they were doing the project (to support growth). She also told them she expected them to run the project, keep her apprised of the status and to let her know any barriers they encountered.  She also coached the project leaders in how to lead (delegate and coach).

At the end of the implementation the project was several months late, somewhat due to technology issues, but it came up relatively smoothly and helped take the company to the next level.

By contrast I worked with two companies at the same time who were essentially sister companies. They had separate ownership but the exact same business model in the same industry and operated in different states. One had some hints of being a CE (the President was a delegate and coach type) and was quite successful in the ERP implementation. The other was run by a President who was a total control freak. For example he negotiated all of the raw materials purchase contracts and wanted us to modify the software to prevent the purchasing agent knowing what their costs were. This company never did finish the implementation and last I heard instead was headed down the path of spending five times as much on a custom developed system.

The first company was truly a pleasure to work with and close to a CE in part because they were customer-centric, community aware and fostered a culture of self-guidance and self-motivation. They strongly encouraged and facilitated employee growth and I was envious of those who had the privilege to work there. As I read Bob’s book I thought of all three companies often.

First Tesla Roadster in British Columbia

What about other factors like new markets a new customer can take your business to or the potential contacts they can offer? And how would you measure a customer like this couple who bought the first Tesla Roadster in BC? Make sure you catch the last line of the post. Hmm… wouldn’t you like this kind of passion in your customer base?  

But back to measuring your best customers.   

It strikes me that a good midpoint of simplicity and effectivity is to measure the profitability of your customers. To do that you’ll need to know what you sell them and what it costs to deliver the products and services to them. When you compare the revenue generated to the costs incurred you have the profit you generate.  

-          Sales minus Cost of Sales = Gross Profit  

By pulling the sales transactions from your accounting system along with the associated costs you can calculate the profit over time for all of your customers. Then sort them in descending order and see if they fall into the traditional 80/20 rule. Is your business similar to many where 20% of your customers generate 80% of your profit?  

That might generate additional questions like:  

• Who is the salesperson responsible for interacting with the customers?  
• What type of customer are they?  
• What region of the country are they located?  
• What is the trend of their buying habits? Are they buying more or less?  
• What products are they no longer buying from you? 

With a little work and the right application, you can easily start to address these and other questions on a regular basis so that you can focus your management efforts on your best customers and working with the next tier to move them into the “Best Customer” category as well. Then maybe you can order your own Tesla Roadster.

How is it calculated?

The “Got” portion of the ratio are the current assets on your balance sheet such as cash, what your customers owe your company (accounts receivable) and inventory. The “Owe” portion of the ratio are the current liabilities such as what your company owes suppliers (accounts payable), credit cards payable, payroll taxes payable, line of credit and so on. Technically it should be anything that you owe in the next 12 months. So to calculate the ratio divide the “Got” by the “Owe” and that gives you the Got – Owe ratio.

How can I explain it?

For every $1 of what you owe, you have (got) $X to pay what you owe.

What does it tell me?

The ratio measures the ability of the company to pay its bills. In general, the higher the ratio the better able the company is to pay its bills. If the ratio is too high it can indicate that the company may want to invest in long-term assets. If it is too low, it can indicate the company may need additional infusion of cash.

What should mine be?

That depends on the type of business you are in. A general range is 2.0, but check with your banker to find out what is the range for your business.

Conclusion

This is one of about a dozen key ratios that you should monitor monthly make sure you understand the health of your business. Keep track of it over several years to be able to track the trend to see if it is improving or declining. And if it is declining, devise a corrective plan and execute it.

Keeping close tabs on the performance of the business is critical, particularly as our economy works its way through this recovery. Managing a business requires a broad set of skills and attention to all parts of the business. Often CEO’s are good at making or selling “things” (goods and service offerings) but some don’t spend enough time monitoring the overall health of their business.

Many people are unsure of what to measure and find it confusing to determine what metrics to monitor and how to take the measurements. I like to start with some straightforward financial metrics that can be implemented quickly so you start managing based on up-to-date information. That way you start getting a return on your investment whether you use QuickBooks, SAP or any other system. These metrics can be done using something as simple as a spreadsheet or with desktop or online dashboard tools.

The easiest things to monitor are sales and cash on hand which are likely to be available in your accounting system, but that is only part of the picture of your business. Positioning the company for growth requires additional effort to understand and monitor not only sales but also those activities that impact profitability and cash flow.  A key to successfully growing the business is identifying a set of key metrics that provide the visibility to help chart the course for your company’s growth, so let’s review “What to Measure”.

Margins - The first step is to understand your gross profit margins (sales minus cost of sales). Begin by segmenting sales into groups of products or services that are similar, such as product families. Segment the cost of products and services into those same groups or product families. This will enable the monitoring of margins by product family and make decisions about pricing and position you to monitor costs in each product line.

Expenses – Next, monitor those costs that create and market the products and services, such as research and development, marketing and sales expenses. To the extent possible, group the costs to design and market products so that those costs can be compared to the margins generated by the sales of those products to facilitate decisions about continued and new investment.

Receivables – Once the products and services are sold and the quicker the receivables are collected, the sooner the cash is available for supporting the business. Speeding collections starts with taking orders accurately, invoicing correctly and following up with customers to ensure that all steps have been done by your company to support the customer’s payment approval process. Measuring these key steps will help reduce issues and speed collection resulting in better cash flow and reduced write-offs and increased profits.

Inventory – If your company creates or buy products for resale, measure how quickly the overall inventory turns (inventory used or sold), and if the company has a process that supports it, measure how quickly groups of inventory turn. Every dollar tied up in inventory is a dollar in cash unavailable for other operating needs.

Operations – Look for operational metrics such as employee counts, number of hours billed, square footage, etc. Besides looking at those operational metrics, try to combine financial metrics with operational metrics to provide a fuller picture of the business.

Measurement steps – Create a dashboard using a spreadsheet or by purchasing a dashboard product. In either case, look for a balance between the level of effort to collect the data and the frequency of providing the information. Start at a higher level of information, such as with financial benchmarking, and keep it simple. Add more complexity like operations as additional areas are identified that warrant more analysis. Look at the trends in the metrics over several years to get a big picture view about where things are improving and where attention is warranted. Also, check with your bank to get industry standards so that a baseline can be established for comparison purposes.

By frequently measuring the important trends in some sort in your business you will be better able to manage it and you will be in a better position to control the growth of the business. Good luck!