“Duh, it’s from all the stuff we sell…we have everything our customers need…”
Of course you do, but as your business grows, do you take the time to figure out what’s really paying the bills? Do you know which customers and products are generating the greatest contribution to profits? If you can’t answer these simple questions, you are probably leaving money on the table.
As businesses expand, it’s easy to try to become “all things to all people.” When you’re just starting out, it’s hard to be selective about customers – even those that might be marginally profitable. Likewise, it’s hard to resist bringing in new products when customers ask for them (yes, even those marginally-profitable customers).
Once you’ve survived start-up mode and have a growing small business, it’s time to take a hard look at where you’re making your money and ask yourself some tough questions.
Customers – The Good, the Bad and the Ugly
- Who are your good customers that value what you provide?
- Who do you have the best relationships with, and who do you enjoy working with?
- Who pays on time? Who is always delinquent and requires handholding by your collections group?
- Who buys three items a year and returns two of them – at your expense?
- Who calls your customer support team, obtains your specialized knowledge, then buys from your low cost, low service competitor?
The list goes on, but you get the idea. It’s hard to run away business, but there comes a point where it’s perfectly acceptable to fire customers that are a drain on your time and profitability.
Products – The Movers, the Shakers and the Deadbeats
- Which products are generating the highest percentage margin? The greatest total dollar profit contribution?
- How many products have you added to inventory that are collecting dust in your warehouse? I jokingly refer to this as the FISH inventory system – First In, Still Here.
- Do you have 17 colors of a product (at a supplier’s urging), and you mainly sell the top three or four colors?
- How much money do you have tied up in product that hasn’t moved in 90 days? 180 days? 365 days or longer?
- How much of your inventory has become obsolete?
Again, you get the picture.
As small businesses grow, it’s hard to resist the temptation to become all things to all people. In the process, companies often begin to wonder why they aren’t as profitable as they were “back in the old days.”
A regular focus on the above items will improve your financial performance and free up working capital. These improvements will be seen in the following areas:
- Improved profitability by focusing on higher margin products (think 80/20 rule)
- Lower inventory ordering and carrying costs; lower obsolescence costs
- Lower costs of expedited shipping and returns to satisfy marginal customers
- Lower costs of collections and bad debts
- Reductions in customer service and support overhead (reductions in A/R and collections staff, supply chain personnel, etc.)
How long has it been since you’ve taken a hard look at your customers and product offerings and their impact on your business results?