Business Growth Simplified
Poor cash flow is a critical concept that many entrepreneurs don’t fully understand. I believe this is because they usually hear about it from accountants that try to explain it in accounting terms. Poor cash flow is an operational issue. And, you fix it by tuning your revenue engine. In the post “Cash Flow – An Entrepreneurs View” I explain the concept of the revenue engine and how it relates to poor cash flow. Finding your revenue engine chokepoints is the first step in fixing poor cash flow. Most poor cash flow problems are caused by 1 or more of 5 things:Unqualified leads can be a killer of time for sales reps by spending time qualifying when they should be selling. This problem has its root-cause in marketing. It means you are talking to the wrong prospects or are using the wrong message to get people to call you. If you have a mix of people that can close the leads in the accpetable range, but others that cannot, this would indicate a sales taining problem. Sales reps that don’t hit the mark need to be evaluated to deteremine if they understand your products and services or have the talent necessary to sell. Contact DE, Inc if you need assistance in evlautaing your sales team.
- Collections are too slow
- Operation capacity is too high or too low
- Not enough sales
- Your price is too high or low
- You don’t have enough leads.
Slow Collections Causes Poor Cash FlowThis is a pretty simple cash flow problem to find. If you don’t get the cash for your product or service in a timely manner then you can’t pay your bills; have to finance your credit; and it cost you more to do business. If you get caught in this cycle too long it’ll put you out of business all together. This is usually where the accountants get involved and tell you “you need to watch you’re accounts receivable (A/R) and how you spend your money and all that good stuff. But, even if you collect upfront or don’t have A/R problems you can still have cash flow issues. The remain 4 problems show you how cash flow is more than just a collection problem.
Too Little Operational Capacity Causes Poor Cash FlowIn the post “2 Things Can Kill Your Profit” I show how your operational capacity can impact your revenue, but let’s face it “realized” revenue is what we’re really talking about when we’re talking about cash flow! If you have too much capacity, then you are spending money on resources that could be spending on something else. Thus you have an expense issue and don’t have the “cash on hand” to pay for the things you really need to be spending like marketing and sales. If you don’t have enough capacity then production is slowing down the revenue flow. If your revenue is not flowing then you’ll have poor cash flow. So, how much capacity should you have? That is depends on a few things. First, are you growing, shrinking, or just trying to maintain you current revenue levels? If you’re growing, then how fast are you growing? If the market is down or you are just trying to maintain that is a different story, but I would say stay between 50% - 80% of your capacitiy. On the low end look at cutting back on the high end make sure you have the capital to add more capacity or you should be create a game plan for how you will raise the needed capital to expand.
Not Closing Enough Sales Causes Poor Cash FlowMany entreprenuers think you need to close 100% of the deals you get or something’s wrong. In fact, most sales professionals will tell you a 20% - 40% close rate is pretty good. If you are outside of this range your close percentage is telling you something. If your close percentage is higher than 40% then your price is probably too low. I speak more to this issue in the next section. If your close percentage it lower than 20%, there are a number of things that can cause this situation:
- Pricing too high
- Leads are not well qualified
- Sales reps need training.
Price is Too High or Too Low Causes Poor Cash FlowPricing is another area where entreprenuers frequently struggle. If your price is too high not enough customers will buy. But, what if the price is too low? Now, the problem become you can’t afford to deliver or you aren’t making the profit that you need to make for the business worth the risk. I would suggest reading my previous post “Avoiding Price Problems That Can Kill Your Business” to find out how to evaluate or fix pricing problems that might be causing your cash flow problem.
Underperforming Marketing – Too Few LeadsAt the beginning of the revenue cycle is marketing. Marketing is a big problem for many small businesses. I believe the reason is because many small business owners don’t understand the real purpose of marketing – to generate leads for sales to close!! There are countless ways to market a business, and with all the new social media tools marketing becomes even more confusing. New Marketing Lighthouse's post "9 Ways to Generate Leads with Social Media" is a great primer to get started understanding how new marketing tactics can help if lead generation is the cause of your poor cash flow If you have poor cash flow, how do you know the root cause? This can be difficult to diagnose without the right tools. A great tool to get a quick snapshot is the Revenue Engine Performance Checkup. It can help locate the chokepoints in your cash flow cycle so you know where to take a closer look and find the problem. Contact me if you’d like a FREE Revenue Engine Performance Checkup.
When I was first asked to participate on this panel, I thought, “WOW things really have come full circle!” You see, I started my business back in 1991 on a shoestring. I had no marketing experience having just got out of the Air Force. I was lucky enough to stumble upon a seminar on the same topic where I met my first business mentor, Richard Gerson. Richard promoted a seminar call Maverick Marketing. I attended and was hooked. Since then, I have used shoestring techniques myself and with clients hundreds of times with great success. Why would any small business use traditional methods when these low cost methods get great result and cost a fraction of traditional marketing methods? While preparing, I realized what a great topic this would make, so tune in over the weeks to come join the discussion with regard to shoestring marketing tactics. I begin with the discussion here with I believe is the most important first step in ANY marketing you do for your business.
Before You Begin Low Cost Marketing
Before you begin using shoestring methods, you better have a solid business and marketing strategy. Or you won’t get the results that you are looking for. In fact, many businesses find themselves wandering aimlessly and don’t know why. It’s because they have no direction.
A business plan is a must. I don’t mean a “go to the bank for money business plan.” I recommend a 1 – 2 page strategic document that communicates what you ultimately want to accomplish and what is needed in the next quarter and year to make it a reality. This plan should answer the following questions:
- What is you vision 3 – 5 years into the future?
- How do you plan to exit your business? (Just close it down, sell it to a buyer or employee, leave it to your children, etc.)
- What do you want to accomplish this year to begin the journey? (This is an annual goal with a revenue target)
- What key factors must you accomplish to meet that goal?
Use the document as a litmus test. As you come up with ideas, measure them against your plan. Does it move you toward your goal and ultimately your vision? If the answer is NO, then put it away for another time. Not applying this approach will find you wandering aimlessly. When you are in business, time is your most precious resource. Once it’s gone you can’t get it back.
Stay away from cool tactics. Focus on tactics that get you the results you document in your plan and it’s only a matter of time before your vision is realized!
What kind of experiences have you had when preparing to market on a shoestring? Share you thoughts and experience with us.
If you need help applying this business planning approach, contact DE, Inc. for a copy of our Business Plan and Action Planning templates. These templates are part of our High Impact Business Planning training, part of our Business Accelerator Training program, is now online!Copyright ©2011, 2010 Dino Eliadis
In a previous post titled Getting Beyond the “Survival Stage” of Growth in Your Business, I touched on the process by which you begin building systems which your business can operate on its own. Here I want to focus on how you actually do it. First, the process is pretty simple:
- Do It
- Document It
- Test It
- Train It
- Delegate It
Do ItThis is the easiest step. Once you’ve completed something enough times you’ve settled on a process that works. You’ve worked out the kinks. You know the objections. You know the gotchas. This is usually where most people stop. I see this all the time. When I ask, the owner will tell me “nobody can do it except me!” That’s because you stopped at step 1 in the process!
Document ItThis means writing down what you do. It’s a good place for a checklist. I recommend a workflow diagram as well as many people learn better by seeing a visual picture. I fall into this category. I can read a page over and over and not get it. Show me a picture and I can do it like I was doing it for years! Here is an example of where someone thinks they’ve got it documented and they don’t. A packing slip shows someone what needs to be shipped right? It shows what someone ordered. The warehouse person just needs to read the packing slip and put everything in a box right. Wrong!!! How should the box be filled? What needs to be put in the box to assure that the content doesn’t get damaged? What about labeling the box, how is it done correctly so that it makes where it’s supposed to go? If this other stuff is not part of the checklist/instructions you are assuming that everyone has the same knowledge as you. If they don’t who knows how things will turn out!
Test ItThis step frequently gets skipped. Just because it’s written down doesn’t mean it works. Testing it makes sure someone can read the instructions and get the desire outcome by doing the steps. As many years as I have been doing this I still get caught. I’ll write a procedure and nobody can understand what I meant in step 4. When you ask people are usually willing to tell you what confused them. Correct it and move on.
Train ItTraining seems trivial in many cases, but you’ll get better results if you do. It’s not just about teaching someone how to do something. It’s about connecting with the person. Showing them that what they do is important enough to take time to work with them. You also learn a lot about a person while working with them. You get to know their learning style. How they process information. You may also get to know what other talents they have that you didn’t even know they had. This could prove advantageous later on, but if you don’t take the time you’ll never know!
Delegate ItThis is ultimately where every owner needs to get – delegation!!! It is a skill that is lacking in many small business owners. If you’ve never been a manager in a big company you may never have had to delegate before. But, ultimately you will need to delegate everything you do in your business. If you don’t you’ll always be tied to it! This is one of those areas where we frequently get involved with owners. Often it’s not the mechanics of the process the gets them stuck. It is their mental state – the inability to let go! It’s not hard to understand why. Their business is like a child that they have grown themselves. It’s hard for a parent to let their child wander off on their own!!! If have struggled with this, share your story of how you overcame the challenge. If you are unsure of where to go next, contact me. We deal with this issue all the time and we’ve developed some powerful tools to assist you in your transition.
A good friend and associate of mine, Stacy Goff, has been saying for years that project managers are agents of change. I’ve always believed this was true, however as I’ve begun my journey down the execution “rabbit hole” it has become even clearer. Think about it. Why do you do a project? You do it to change something. It may be to fix something that’s broken. It may be to implement new computer software that will make you more productive. Maybe it’s to after a new market or to expand an existing one. In all these cases, you are changing the status quo. And you’re using a project as the vehicle to implement the change. That being said, then project managers ARE change agents! But, that means that a good project manager or even a business owner that is trying to execute on their strategy must be open to change themselves! This may seem like a given. But, more time that I care to admit when talk with a business owner whose business has stagnated the reason they’re not moving forward is they don’t think that they need to change to achieve their desired outcome. Think about this. Even if you are expanding something that you’re currently doing, it’s still something different. If you don’t make the shifts necessary you won’t get the results you want. Good examples are companies that use to use print media and the yellow pages to generate leads. When the market started to use different mediums like online directories and the Internet to get these services or products leads began to decline. The companies that didn’t shift to the new mediums died. The ones that did survived. Let’s look at a company that wants to go to the next level or maybe hit the self-sustainability stage of the growth model. It requires more people, more capital, more coordination, more space and equipment, more, more, more… If an owner has never managed something like this, the likelihood that they have the needed leadership and management skills are high. If they don’t acquire the skills what happens to their business? You’ve seen it happen hundreds of times – the business stagnates and just stays the same year after year. Here is a perfect example where change needs to occur. But, because many business owners have had some level of success in their life they resist making the necessary change because they already think they are successful! I agree THEY are successful. However, their business has not yet reached the self-sustainability stage. As a result the business becomes more of a job than a business as the value comes from the owner’s actions instead of a part of the business’ operation. So, what’s the project for change here? Actually, there are dozens of projects that need to be competed to make this transaction. But, the first one is making the owner understand that he/she needs to change themselves through gaining greater self-knowledge or their business will never become what it can become. So you see CHANGE is critical. And, we use projects as the mechanism to create change. They first project for change in most small businesses is the owner, who needs to work on themselves to acquire the needed skills to manage and lead at that next level. Have you seen this happen before? Share your examples, as they are more common than you may think. If we can get one owner to see the change they need to make in themselves it’s worth the effort as all the employees of a company are affected by the owners in ability to change. If you help one owner the impact is far reaching so share your stories.
Stagnant growth is a result of a misfiring revenue engine. In order to grow your business you must expand. The revenue engine is a concept DE, Inc created to explain how to evaluate the operational cash flow cycle of the business to small business owners. If you don’t understand when your revenue engine hits its limits then when you get to those points growth slows. If you don’t recognize that your revenue engine is broken growth stops all together and the business stagnates. Many small business owners find themselves in this predicament. The problem is they don’t know what’s wrong. Or, if they do know what’s wrong, they don’t know where to focus to begin to fix the root-causes to their situation.
Fixing Stagnant GrowthTo fix stagnant growth first you must identify from where your problem originates. I can guarantee with 100% certainty that it originates somewhere in your revenue engine, as it is the revenue engine which produces business growth. This is why the Revenue Engine Performance Checkup is such a powerful tool. It is design to show you exactly where your chokepoints lie. Once you know the problems you can systematically determine what you need to do to correct your specific situation by asking a series of specific questions. One key to this process is you must work the problem backward. That is, start from the back of the revenue cycle and answer the questions in order toward the beginning of the cycle. So, you must start with the operations, move to sales and finally go to marketing. Lets take a look at the questions you should be answering to solve your stagnant growth problem.
Fixing Operations Issues that Cause Stagnant GrowthFirst understand that typically business growth stagnation is the symptom of capacity problems. So you must understand the capacity metrics of your business to identify the problems. Answering the following question can help you pinpoint operational capacity problems:
- How long does it take to produce one unit of your product or to service one client with what your business offering? (cycle time)
- With your current resources what is the maximum number of units you can produce or number of service offerings you can provide during a specific period of time (day, week, month, etc.)
- How much more can you currently handle before you reach you maximum capacity?
- How much will it cost you to add capacity beyond your current resources and when might you get to that point?
Fixing Sales Issues that Cause Stagnant GrowthIf you have excess capacity then you have something to sell. You just need to get out there and start selling - right? Well, that might be the case but you may have a capacity issue in sales too! You measure the capacity of your sales function via your sales funnel. If you are not familiar with the sales funnel concept I would recommend reading the post “Is Your Revenue Underperforming?” Here are the questions you must answer from a sales perspective to fix stagnant growth:
- What is your current sales close percentage?
- How long does it take on a calendar to close a sale (sales cycle)?
- How many additional sales must you close in order to reach maximum capacity?
- Is your current sales team sufficient resources to sell the required number of sales to reach your goal?
- If not, when do you reach sales capacity and how much will it cost to add more sales reps
- What is the source of this capital?
Fixing Marketing Issues that Cause Stagnant GrowthIf you have sufficient capacity in both sales and operations then why don’t you have enough sales to fill your capacity? Because you don’t have enough leads to sell to! Seems obvious, but without the answers to the previous questions it is difficult to determine exactly how many more leads your marketing needs to produce. Here are the questions you must answer regarding your marketing to fix stagnant growth:
- How many leads does your marketing currently produce during a given period? (day, week, month, etc.)
- How many leads do you need to get before you are asked to write a quote or proposal?
- How many additional leads must you generate in order to reach maximum capacity?
- Is your current marketing team sufficient resources to generate the required number of leads to reach your goal?
- If not, when do you reach marketing capacity and how much will it cost to add more marketing resource?
- From where will the capital come?
Fixing Stagnant GrowthThis is a fair simple process. If you are not sure exactly how to calculate some of these numbers contact me and I will send you one of our Success Planning Worksheets (SPW). SPW is a form we use in our Tuning Your Revenue Engine workshops to walk participants through the calculations. It is structure just like the math worksheets we all learned to do arithmetic with in 1st grade. So it’s one page with large text formulas to give your answers you need to begin fixing your stagnant growth!
Lately I have been involved with a number of startup businesses, including a couple of my own. One observation I have made is that many small business startup owners tend to focus later stages objectives rather than the early stage growth cycle objectives they should. The result of their focus on the “wrong” objectives is what causes so many startups to fail. First, let’s take a look at the small business growth stages that really makeup the startup stage. My opinion is that a business in the “startup phase” until it can achieve financial breakeven on a consistent basis. What does that mean? That means the business can pay all its bills every month without the owner investing more of his/her money. By this definition there are 10-year old businesses that still struggle and are considered in this startup stage. And, I would say this is an accurate statement. The main purpose of any business is to make money. If it cannot do that, then it has not met its first major milestone, thus it is still in “startup mode.” In a previous post titled Nowhere Land – Stuck Between Small Business Survival and Success, I shared a common problem many small business owners face when they feel they have a successful business. But, what they really have achieved is personal success. These businesses are in the later stage that we find startups. They are only one step ahead of a startup as these owners have found a way to “personally” assure that their company turns a profit and are rewarded from it. The difference with startups is they are still struggling to find consistent cash flow and if they’re lucky some level of profitability. So, how does a startup get to the next level? Easy, by focusing on the objective of the first two stages of the small business growth cycle! Here is a list of the milestones that an owner must focus on if they are ever to get beyond the startup stage:If any of these objectives seem foreign or unclear to you, then you have another objective to address – getting some business training. If you don’t know how to accomplish these objectives chances of you moving forward decrease dramatically. I believe this is the reason so many startups fail. Seek out the assistance of a small business development center in your area or find a business coach (not a personal coach) in your area. If you’re unsure of your business’ current situation the DE, Inc. overview video Tuning Your Revenue Engine is a good place to start. If you want a roadmap to follow to meet these objectives the DE, Inc’s SPARC Business Growth Framework will help you build the roadmap specifically for your small business. Where in the cycle is your startup? Or, if you have successfully navigated your small business through the startup stages, share your story so that other may benefit from your knowledge.
Foundation Growth Stage - Startup:
- Assure you are generating enough cash to meet financial needs
- Test market acceptance, determine a market exists for your product or service
- Can you find enough customers to survive to the level of your sales plan
- Provided service well enough to be create customer loyalty
- Expand beyond 1 key customer
- Accomplish the proper legal structure for company to protect yourself and the entity
Survival Growth Stage:
- Move your focus from cash to sales
- Establish a customer base and market presence by modeling profitable client needs
- Focus on getting your product/service into the market.
- Generate enough cash flow to break even & to finance growth
- Hire people to help
- Conduct a reality check: Is the business on the right track, or does a different business model create greater future asset value for you company?