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The day-to-day health check for managers of small enterprises


Click Here to print your own 16 point checklist.  Keep it on your desk!


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Let’s focus on “Management”


In small businesses everywhere, it is almost inevitable that the business owner takes on all the management responsibilities for the organisation. This becomes difficult for many who lump together three related activities, “management”, “administration”, and “supervision” and call all three“management”


All the things you do as a manager come down to these three:

 

                        You administer the functions of your business

                        You supervise your staff, but,

                        You manage your business.


This “Management Memo” is about managing the business. “Management” is what you do that no-one but you else could do - regardless of any skill they might (or might not) have.



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Day-to-Day “management” is a “Daily Grind”


No apologies to “Gloria Jean’s Coffee” - but being the manager is a “daily grind”. Here we are focussing on the real, hard core “Management” with a capital “M”. For a moment, leave behind the “daily grind”.


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Management is in tension between short and long term


You hear a lot about “strategies” when discussing “Management”. That usually means things that have effect over a longer time. Very important. Let’s ignore them here - this is about day-to-day.


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It all begins with a sale!


You know the expression “the bottom line is....”. You can only have a “bottom line” if first you have a “top line”.


So the first item in our daily check list is “What is the sales result?” That means “Sales” as it interests the Tax Office - the invoiced sales. Bit tough on the sales team if you’re selling long lead items that might be made to order. But that’s the way it is. It’s only invoiced sales you should be interested in. That’s the only money you can bank - at least you can when credit customers finally pay their bill.


Now we’re talking the same language, remember each month’s sales is only the sum of 20 (or up to 28, depending on your trading times) individual daily sales. You won’t meet budget if the average daily sales level is below the target for the month divided by the number of trading days. Sure, sales can be lumpy. A toaster , a mixer and a clock radio today - a wide screen plasma tomorrow.


But what about the average? You have to keep it up. No good saying, with four days left in the month, we have to get these “X, Y, and Z” orders in. If the pressure wasn’t on from “Day 1 This Month”, you will either be lucky, or missed out. You won’t have a managed success month.


Every enterprise has to work out what daily “rule of thumb” measure suits it best to measure the sales result. Here are some suggestions:

 

                        How many “doors”? - that is how many shop or showroom visitors . Assumes a constant conversion rate and known average sales value. Applies to some kinds of retail.

                        How many phone enquiries/orders? Good for wholesalers, or organisations which visit clients/prospects at home or in their place of work. Again, assumes known average sales value, and in some cases assumes conversion rate too.

                        How many transactions recorded on the till? Shows the level of retail activity - and if activity is right you can merchandise your way to achieving the sales budget

                        Total of the daily sales? This is the holy grail of daily sales monitoring. This is the money you can count on to bank.


Choose at least one. The best one you can monitor almost automatically. Don’t set up another system - use what is already there.


Of course, this is not the complete sales story. It is not meant to be! It is a quick measure you must take each day to check your course towards achieving the sales budget for the month.


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Sales should meet or exceed Budget


“The Budget? A budget can be anything you want it to be. What’s the point in a budget if the weather can change things so much?”


You might think this way about a budget, many people do. Point is, you do have a plan for your business this year. You might want to get “at least the same sales as last year”, or you might aim for “20% more than last year”, or some other relevant objective. So, if that really is your plan, why aren’t you bold enough to put it into numbers? When you do, you have a budget.


This means, of course, that if you are going to “manage the business”, and not just “administer the functions”, you need to take whatever action is necessary to make sure you achieve the objectives you have set yourself. In other words, you need to “meet budget”.


On a day to day basis, you can check the sales each evening to see how you are tracking. For a more formal view of how your sales are going on a month to month basis, you can see the whole picture in BizMon®, the Red Zebra Business Monitor.


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Sales work isn’t just what the office happens to invoice on the day!


True. In some fields, the work of the sales people doesn’t show up for weeks or even months. That doesn’t mean you don’t check the “total of the tape” each day. It just makes the task of managing a bit more complex. You still need to check that daily sales are booked (invoiced) up to budget level. But there is this other dimension too!


Suppose you are selling a coolroom made to order. Lead time between the sales presentation and the order is perhaps two months. Manufacturing lead time from the factory is, let’s say, three months. Installation can be scheduled, but will take six weeks to final sign-off by the customer. Then you invoice.


You have a bad case of “the future that’s already happened”. Your sales performance seven months hence has been determined by what your sales people have done today. Now you have to keep, not only a close look on the sales made (invoices booked) today - because all kinds of delays happen unless you are on the case and sales will slip, they always do - but you also need to keep an eye on your “order book”.


You are keeping an order book, aren’t you?


Once again, keeping a formal order book is just one of the many aids you need to make sure you are “managing the business”. How this order book is tracking through the year is also reported in BizMon®, the Red Zebra Business Monitor. This way you keep the business under your control, and don’t find yourself being run by the business.


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Business keeps changing - a static “budget” isn’t relevant these days.


Two things.


First. Change the budget if you change your business plans. After all, the budget is your business plan in number form. If your original plan can’t be met, your expectations will change. So should the budget.


Second. The budget is the framework for the year. If the first few months have been below par, your targets for the rest of the year will change automatically, unless the environment has changed your overall perspective. Make sure your sales people are changing their targets to reflect the leeway they need to catch up. If you don’t - you are the one who loses.


Constantly revising your sales targets in light of your recent performance is another part of the management puzzle put together for you in BizMon®, the Red Zebra Business Monitor.


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Look, sales is just one part of it. You can’t focus only on that.


That’s right. So let’s look at “Stock turn”!


Big investment, stock. If it’s not turning over, it is dead money. What is your stock budget? What is your “Open to Buy”? Is the stock turning over physically, or do you get a good financial stock turn and have the wrong physical stock? Want to know more about this? - Click Here


Meanwhile, if your stock value (at selling price) is more than the sum of your last two month’s sales, you have an issue to address. It will be easier though, because your stock is usually valued at cost, to have a stock value in mind as a ratio to your sales budget.


If you are operating at a margin of 30%, and you are shooting for a stock turn of 6 times, your stock value would be about one eighth of your budget annual sales value. Over that, and you rein in purchasing, and set up stock clearance measures to move that slow stock! (Naturally, for you own business, you will need to decide what stock turn is “right” for you, and of course, factor in the actual margin you want to achieve.)


Need help on this? Click Here!


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How’s your Gross?


“I tell you, I make sure I get the right price. I’m not giving anything away!” That is said so often. Somehow, the idea has gained currency that you have to protect your gross margin. What an astonishing fantasy - even more astonishing that so many people accept it!


You can’t bank a percent! We have recently been looking at some financial outcomes for 2004 -05. It has been a tough year for retailers of all kinds. In a number of cases, the sales have been through the floor compared with budget, although the margins have been high - in some cases higher than budget. That is a clear indication that sales have been lost with no attempt, or at best with little effort, to trade into success.


Price points move. What was a good price point in a good year can be a “bummer” in another environment. Experimenting with price points to stimulate sales is a sure fire way to increase your market share. Providing you do it right, and doing it right is the key, you will find the price point that gets the sales volume up more than the price goes down. The result is more volume, better buying, and most of all - more gross profit dollars. More gross profit dollars is bankable. Yes - your gross margin in percentage terms will go down, but you don’t bank percentage!


In short, managing the business means forgetting percentages, and changing whatever you do so that the gross profit dollars meets budget.


Understanding the pricing mechanism is not as easy as it seems. For powerful pricing help, use BizPro® Full Value Pricing to increase volume and profits. For more information, Click Here!




  

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Expense - Running to Budget, or running to budget ratio?


OK, so “The Budget” is your business plan in numbers. If half of your plan is underperforming, have you kept your business in balance? Simply put, it’s no good running at 75% of sales budget and 90% of total cost budget. You’ll make a loss!


Think of it this way. The profit you make is a small difference between two large numbers. A small percentage shift in one of the numbers means a huge percentage difference in profit. In most cases, a 5% reduction in sales, and a 5% increase in costs will create a loss situation. Again, in most cases, you would hardly notice a 5% drop in sales. After all, in a month where you expected $200,000 in sales, a sales achievement of $190,000 probably looks OK. Beware!


Your total cost includes cost of goods sold, so just as you watch your gross profit, hold expenses to the planned ratio of sales - NOT the planned dollar figure.


(For a worked example, Click Here.


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Debtors. The other side of selling on trade credit.


It’s often said that more companies go out of business through poor cash flow than from losing money. So how do you keep debtors under control?


The steps to control debtors are well travelled - use realistic trading terms, send timely invoices, send a statement within 14 days of the end of the month, then a reminder, a phone follow up, and apply “Stop Shipment” on the day the limit is crossed. Use a debt collector when all else fails.


It does not often come to that, but what is a reasonable level of debtors to run with - always assuming that you can use debt collectors when the time arrives?


Two ways to look at it.


First. If offering trade credit is not a big part of your sales pattern, then debtors aging is a well known routine. 80% at 30 days, 20% at 60 days, with 10% at 90 days or more is pretty common, even though not especially good. This gives an average aging of 45 days. Is your average debtors aging more than this? Take action - and take it now!


Second. If providing trade credit is a significant part of your business, you need a more sophisticated approach. How many days sales does your trade debtors cover? On a five day a week trading basis, and if all the sales were credit sales in the example above, it would mean that the trade debtors covered thirty days trading - that is, a month and a half. Could you risk all your debtors running a month late, so that there was no cash inflow for a whole month? Probably not! That’s a risky position to be in.


Often running at fifteen days cover is thought to be more acceptable. That would happen in the case above if only half the sales were on credit, and the rest were on credit card, EFTPOS, or cash.


So the usual, conventional measure of trade debtors may not be an adequate tool to measure and manage your business. Need help, more advice, or just a quick chat. Click Here!

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Keeping assets safe and working.


We have looked at your stock and debtors. There is a good chance that these two combined represent your biggest asset value. Not the only asset though. Other assets can serve you poorly if they are not managed with equal zeal.


Your store or showroom fitout is an asset easily devalued by poor stock handling practices, carelessness, and a lack of attention to merchandising displays. Make sure your staff are changing displays regularly, changing burnt out light bulbs, putting stock away properly and promptly, dusting and tidying shelf, aisle display stack, and pallet stock, and recording stock movements between warehouse and service or delivery vans.


Motor vehicles, and expensive special purpose machinery have been acquired to make you money. Idle time is unproductive and costly. Special purpose equipment is often left idle, just because the staff value their convenience more than you productivity.


On a daily basis, check stock condition, merchandising displays and special equipment utilisation rates.


In all this, it is assumed that you are, as a matter of policy and routine, protecting yourself against fraud, theft, and careless damage.


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Summary


You need to manage your business - that is, you need to be doing specific management tasks in addition to your administration and supervision tasks.


This means delegating administration and supervision wherever you can and if you can’t delegate, then set aside time for “management only” activities.


Take planning seriously, and especially its numerical form, budgeting.


Set up daily benchmarks for performance in invoiced (and/or cash) sales, order book, and gross profit


Maintain expenses in the planned ratio to sales.


Monitor and pursue trade debtors.


Monitor stock and control purchases to achieve planned stock turn.


Monitor the usage of motor vehicles and special purpose or very costly equipment


Check stock for cleanliness, tidiness, and merchandising excellence.


And take action as required to ensure that all your planning objectives are being actively pursued.





- DOCUMENT ENDS -


Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.




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The importance of Small Deviations from Plan

The profit you make is the small difference left after you take the total costs (a large number) away from your sales revenue (another large number). A small percentage difference in one or both of those large numbers can wipe out your profit.


Suppose your annual sales are going to be $2.4M according to plan. Your expenses and cost of goods sold will be budgeted to be $2.16M, leaving you a profit of $240,000, or 10% to sales. Not real good. Not real bad. Just adequate!


Your P & L budget will look something like this:

 

                                       Sales                                                        $2,400,000

                                       Cost of Goods Sold                               $1,680,000

(Assuming a gross margin of 30%)

                                       Gross profit                                             $ 720,000

 

                                       Total Expense                                         $ 480,000        (20% to sales)

 

                                       Net Profit                                                 $ 240,000        (10% to sales.)



When the year begins, your monthly sales are, on average $160, 000. Not so bad, huh?


Perhaps there has been a little more travelling, a wall needed painting and all the office computers needed to be replaced. There were a few other things, and then there was the need to increase the pay rate because a key person was unhappy. Actually, monthly expenses were running at $42,000. Not bad compared with a budget of $40,000.


Now, your actual P & L looks like this:


 

                                       Sales                                                        $1,920,000

                                       Cost of Goods Sold                               $1,344,000

(Assuming a gross margin of 30%)

                                       Gross profit                                             $ 576,000

 

                                       Total Expense                                         $ 504,000

 

                                       Net Profit                                                 $ 72,000         (3.8% to sales.)



The combined effect of sales being only 20% below your plan, and expenses only 5% above your plan, is to cut your profit by a hefty 70% - that is by $168,000. And that is your money that’s gone missing!


Now, alternatively imagine that you kept the expense ratio right. Your properly managed P & L looks like this:


 

                                       Sales                                                        $1,920,000

                                       Cost of Goods Sold                               $1,344,000

(Assuming a gross margin of 30%)

                                       Gross profit                                             $ 576,000

 

                                       Total Expense                                         $ 384,000        (20% to sales)

 

                                       Net Profit                                                 $ 192,000       (10% to sales.)



In other words, tight expense management has kept your net profit at 10% to sales, and you have $120,000 more in your pocket, despite the sales short fall!

 

Of course, the key is to act quickly! To do that you have to have good information systems, and interpret the results accurately. Regular monthly BizMon® analysis reports are an inestimable help here. You won’t always be able to cut your expenses hard enough, but the sooner you start cutting the better. Just one thing. Since the root of the under performance is low sales, any expense directed to increasing sales should be cut only as a measure of last resort.


Happy Management!