As an entrepreneur, focusing on your sales numbers is a good thing. However, focusing only on sales and not paying attention to the other key numbers in your business can hurt you in the long run.
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Business owners like to focus on sales and revenue growth as a measure of how good their business is doing. It feels good to tell someone that you reached X dollars of sales or that your sales are up 25% over last year. However, too much focus on sales can hurt you if you are not paying attention to other numbers in your business. Focusing only on sales and revenue growth can lead to problems for your business in the long-run.
*It’s important to grow sales but it is also to pay attention to things like sales mix and cost structure.
*Pay attention to sales mix so that your sales are not overly concentrated in one particular area or segment.
*Sales quality is explored and we define the types of things that help make a quality sale
*Unprofitable sales can hurt your business.
*Entrepreneurs need to understand their cost structure and define pricing and discount policies to avoid unprofitable sales
*A business’ cost structure includes both direct and indirect costs and each need to be considered when pricing products and services in order to achieve the profit margins that you are driving toward.
*We look at how to measure yourself against your own performance and your industry segment and benchmark things like margins and profitability.
Terms Used in The Episode
Resources and Links
Below are some links where you might find business comparisons (note: some of these resources are free others are paid):
BizStats – free business statistics and financial information
Industry information from Yahoo! Finance
Bplans – industry reports
Market Research.com Industry reports
IBISWorld Industry Research Reports
Hoovers Industry Directory
Report Linker Industry Insights
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Lisa Roberts is a business operations specialist who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track. You can find out more about her here .
“Our largest customer just told us that they’re going in a different direction and don’t need us anymore!” – VP of Sales
I’ll never forget the look on that executive’s face. Shock, disbelief and fear; deep fear.
Almost 50% of our sales were going away. A customer that paid us for our services, month in and month out for about 15 years was gone, just like that.
And with that, a few years of struggle began for the company that I had just started working for less than two years before. Replacing that amount of sales was going to take a while.
How can companies avoid this? Is there a way to, at least, reduce the risk of it happening to your business? What things should you look for in your business to make sure the same fate doesn’t happen to you?
Five Reasons Your Sales Numbers Are At Risk
Dependent on a Few Customers
This is what happened to my company. We were moving happily along with this large international customer providing them technical services for 15 years. During our business relationship, we worked hard and gave them very good service. Since they were by far the biggest customer, they got a lot of our attention. Sure, it was great to have a customer like that; the sales came in like clockwork. The problem was that we didn’t do a very good job managing our sales and marketing to be less dependent on a few customers. Because we hadn’t grown enough, the loss of that customer was a huge problem. When we got the news, it was like a death in the family.
Industry / Economic Changes
I think we all understand how the economy can affect sales because we’ve been living (and struggling) through it the last several years. Industry changes can be a little different depending on your own industry. For example, in construction, the industry shifted when the traditional single family home gave way to the even larger houses a few years ago. Now, something called “tiny houses” is gaining traction in some regions. For restaurants trends like “fast-casual”, mobile ordering and even rising food costs are changing the landscape for the industry. Technology has affected many industries especially in media where digital music, streaming movies, and online media are doing a number on the music, Movie Theater and newspaper industries. Industry and economics can put your sales at risk if you don’t keep up and adapt to the changes.
Commoditization puts sales at risk too. Many products became commodities over the years and some have even become “un-commoditized”. A commodity is a product or service that is mass-produced, with relatively little variation and is widely available. Since it’s widely available with little variation, consumers will be more price sensitive. Think sugar. You typically don’t care about the brand, you just need sugar to make cookies or sweeten your coffee. Coffee was another example until Starbucks®, gourmet coffee and K-Cups came along. Now, stroll down the coffee aisle in any grocery store, there are multiple flavors, strengths and brewing methods to choose from. When I started drinking coffee in college there wasn’t much choice – coffee was coffee!
Competition puts additional risk on your sales. There is always someone out there who will compete either directly or indirectly with your business. Direct competition competes on product or service, price and convenience. Direct competition tends to have similar overall business goals. Examples in the restaurant business might be McDonalds® vs. Wendy’s®. Indirect competition will compete with similar products or services but may differ in its business goal. Indirect for the restaurant industry might be McDonalds® vs. TGI Fridays®; you can get a hamburger at both but they have different business goals as well as variations in the products they offer. Replacement competition offer similar products and have similar business goals but may be different in the way they reach that goal. One example that has changed an industry is the digital camera; this replacement competition has all but put the film and film camera industries out of business. Knowing who your main competitors are and what their strengths, weaknesses and goals are will benefit you when trying to ward off the competition.
Your Own Company
The last reason your sales could be at risk may be what you’re doing or not doing. It is easy when you’ve been in business awhile to forget what got you here and what differentiates you from other businesses offering the same product or service. Customers change and what they value can change too. If you’re losing sales, it may be that you need to look inward to make sure what you offer still provides your customers the quality, value and good service that got you customers in the first place. Letting any of these slip can create an opportunity for customers to look for competitors to fill their needs. Listening to your customers and prospects can also help you make improvements so that you stay competitive and on top of your game.
Now that we’ve identified some of the reasons that your sales are at risk, let’s look at some things you can do to combat these in your own business. Here are some things that you can consider:
In the company that I worked for they didn’t try to expand until after they lost their biggest customer. For us, we relied too much on one customer, so we increased our sales efforts to capture more customers and generate more sales. We also created a new product that added brand new sales and reduced our reliance on one customer. Expanding can include increasing your geographic region, offering products in a new previously untapped market, or focusing on growing a specific segment. As a result of our lost customer we also implemented a sales management tool that helped us focus more on where our sales were coming from, showed us how concentrated they were among our customer base and also helped us better forecast future sales. Growing and expanding your customer base can not only increase your sales, but also make you less reliant on one or even a few customers.
I mentioned that we offered a new product, but it was already technology that we had in-house. Our innovation involved an effort by product management to get the technology ready for sale to complement our existing customer base. Creating a new product or even a new service that complements your current product or customer base is a way to grab a tighter hold and ward off competition. Another way to innovate is to find a new way to deliver your products or services. We see that in the music industry with things like iTunes®. Amazon® revolutionized retail with its easy order and delivery model and locally I see it with restaurants grabbing sales by delivering food to the beach. Another way to transform and innovate is how you engage customers to aid in obtaining feedback and improving your products and services. Customers can provide a wealth of feedback that was very difficult and expensive to collect before social media and the internet.
Packaging is another way to stand out from the crowd. Bundling your product or service with something else can set you apart from the competition. Packaging your products with a warranty, service contract or some other offer can help differentiate you. Cable companies and wireless carriers offer bundles at lower prices to capture more customers and make their product “sticky”, as customers rely on them for more and more services. Some restaurants have bundled too – think value meals and free refills. Computers have been bundling software for years and airlines and hotels have also teamed up. Even my auto insurance company bundles a roadside assistance in with my policy, which allowed me to cancel my stand-alone roadside plan.
Keep Your Risk Low
It was almost 20 years ago that we lost that customer and I still remember it like it was yesterday. It was a difficult time but we managed to bounce back and grow even larger. Business has many risks and one of those risks could be lost sales. Part of your business management plan should be to keep an eye the risk factors that exist in your business. Listen to the market, the industry and don’t forget your customers too. Take steps to manage your risks to keep your sales levels where you want them.
This is a question business owners get all the time. To be able to answer that question, a good objective review of your business results will help you to answer. This post will give business owners some good practices to put in place to help them stay on track toward their goals, effectively analyze and measure performance and find opportunities for improved business results.
Many entrepreneurs I’ve met are working so much in their business that they never stop to take a hard objective look at it. So many of them work in their business and not on their business that, at times, they fail to see something coming that may disrupt and challenge their business’ very existence.
Here are some good practices that you can do each month or quarter in your business to help you to stay on track toward success.
# 1 Financial Results for the Period
To understand how well your business is really doing, you cannot just look at sales. The biggest part of you business results are in the financial statements. Many business owners, especially in the beginning, make the mistake of thinking that if sales are growing then everything else will be okay. This is not always true since sales have to be profitable and create sufficient cash flow to meet the needs of the business. If you are waiting for your accountant to produce your financial results several months later, you may be missing opportunities to take proactive steps in your business to find cost savings, reduce taxes or identify unhealthy trends in your business.
#2 Comparison to Prior Periods
A good way to determine how effectively your business is performing over time is to review your results with prior periods. This will help you to identify areas where you have improved and also areas where you have declined such as the sales of a particular product or service line. It can also help to reveal problem areas in costs and expenses. Once identified, these areas can be investigated and you can begin to look for ways to find savings.
#3 Comparison against Budget
You did do a budget for your business right? Some businesses don’t believe in using budgets. If you are one of them, congratulations, you must have an endless supply of cash. Of course, most businesses do not. Budgets don’t have to be difficult if you understand your results. They can be easy if you have been in business for a while since you already have a baseline to build from. A comparison of your results against your budget can identify areas where you haven’t been as efficient or effective as you had planned and can quickly provide you with the information to take action. It can reveal unplanned trends like we have seen with fuel prices over the last several years. It can also help you reset your priorities if results or circumstances change.
#4 Sales Forecast Reviews
At regular intervals, monthly or quarterly, it’s a good idea to take a look at how you are performing against the forecast plan that you set at the beginning of the year. Are you sales coming in as expected? Are there areas where you can increase your efforts with existing customers to increase sales? Are you increasing your opportunities with new prospects with your marketing and sales efforts? Companies often must plan investments in labor, promotions and products based on how well they believe they will perform in the future. A good business will review results against forecast so that they can make changes to their approach if things are not going as planned.
#5 What’s working and what’s not
Most growing businesses have new projects going on all the time. It may be a new product offering, a hiring push, a marketing effort, a new large customer or an effort to improve efficiency in a certain area. Projects like these need to be reviewed as they proceed to make sure they are working as planned. It is a good idea to step back from time to time during these efforts to determine results so far, what is working and what is not so you can make changes or pivot before too much time and cost is spent.
#6 The Challenges You’re Facing.
Companies face challenges that disrupt the flow of business and sometimes threaten profitability, operational efficiency, employee morale or a host of other things. Just as we recommended above in reviewing projects, strategies and financial information, it can be helpful to analyze the challenges that your business is facing. Many of the internal challenges that companies face can be broken down into three categories and they are people, processes, and systems. Other factors are external, but can affect your business as well. These can be factors like political, economic, social, technological, environmental, and legal. Periodically, it is a good idea to review any internal or external factors that could affect your business and take action to address those before they become a problem.
Get into the habit of reviewing your business results on a regular basis. Take time to objectively review your results, determine if you are on track and ensure that you are managing the business priorities to pave the way to success.