Phil

by Phil Latz

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Hi, welcome to this latest blog in my finance series that I hope will help you become more successful in your business.

As a business owner myself for many years, I understand the challenges that you face.

The theme of this series is how to maximise your profit.

In today’s blog I’d like to talk about six steps or stages that you need to achieve in order to be fully successful in business.

I did not create the content of this episode myself. It comes from ActionCOACH which is a global coaching business. I worked as a part time contracted coach in an ActionCOACH franchise for just under two years until 2020, which is where I became familiar with the concept of these six steps.

If you like this content and would like to hear more along the same lines, then feel free to follow up with ActionCOACH directly.

I’m neither going to be sharing the full detail of the ActionCOACH material or using all the same terms. I’ll be giving my own interpretation.

Think of the six steps like a set of stairs. Each one builds on the next. You can’t jump straight to step six unless you’ve built the five that underpin it.

But this analogy only goes so far, because in the real world of running a business, challenges come at you from all directions. For example ,you can’t exclusively work on step one when you’re simultaneously faced with challenges that relate to steps two and three.

So let’s take a look at the six steps from bottom to top.

Step One is Mastery. Action Coach divides this into four foundations of your business: Destination, Time, Delivery and Financial.

Destination relates to your planning and goal setting. I’ll be going into this in more detail in the next video when I look at author Stephen Covey’s statement ‘Begin with the end in mind’.

Many aspiring new business owners race through the planning stage because they’re so keen to get stuck into the ‘real work’. But thinking about your business’s vision, mission and culture, writing a business plan and setting goals are invaluable foundational steps. 

Remember, a goal, not written down, is just a dream.

Time relates to how you spend your time. Remember, no matter how wealthy you become you still only have the same 24 hours per day, so time is more valuable than money. If you haven’t already watched them I’d strongly recommend you watch videos five, six and seven in series one as these give you keys to making the most of your time.

Delivery relates to the nuts and bolts of how you’re going to interact with your customers and give them a positive experience that will keep them coming back to you.

Financial relates to all of those statements and spreadsheets that so many business owners dread. But in business you have to face the music! If you’re uncomfortable with financial statements then please watch ‘Financial Statements Demystified’ which is video two in series two. This takes you through the basics in jargon free terms.

Once you have these foundations laid, you’re ready for Step Two, Niche.

Niche starts by defining what is your unique selling proposition or USP? In other words, why would a customer buy from you rather than one of your competitors.

It then includes the five ways to maximise profit. Rather than repeat these here, please refer to video six in this series which I’ve entitled ‘Five ways to increase your profitability’ to find out what these are.

By the time you’ve mastered the first two steps you’ll have all of the business fundamentals in place. You know what your USP is and you’ve figured out how to make a profit.

Now you’re ready for step three, Leverage. This is where you scale up, or crank the handle faster, if you like, to accelerate your profits.

There are four ways to increase your leverage. You can improve any one of these four areas or possibly two, three or all four of them.

• People and education
• Delivery and distribution
• Testing and measuring
• Systems and technology

By the time that you’ve successfully leveraged your business systems, you’ve probably experienced significant growth in your business. Remember, growth in itself should not be your goal. As I’ve said in previous videos, turnover is vanity, profit is sanity and cash is king. Please go back and watch videos two and three in series two if you’re not familiar with this.

But as your business grows, you’ll reach a point where you’ll become the constraining factor of your business. You can no longer be the key person through whom all decisions flow. You’ll need to put a layer of management in place and build a winning team. 

This leads to Step Four, Team, which looks at recruitment systems, work environment and keys to building a winning team.

Unless you can successfully recruit, motivate and retain high calibre people within your business, you’ll constantly be bearing the full burden upon your shoulders and your business will suffer as soon as you start to burn out.

This leads to step Five, Synergy. Action Coach defines a successful business as a commercial, profitable enterprise that works without you. Far more business owners achieve the first part of this definition than the second part.

That’s why the vast majority of business owners only own one business. But there’s no law against owning two, three, four or more businesses. The key is having all necessary systems in place, overseen by a General Manager who you’ve trained to run that business.

Once you’ve achieved this step you can move to Step Six – Results. This is where you no longer have to work in any of your businesses. They create passive income for you, which you can invest in other businesses, or a wide range of other investment options.

Because the businesses that you own are so well managed, with such good systems in place, and generating consistent profits, they are highly saleable assets in their own right, should you ever choose to sell.

For many small business owners, level six looks like the top of a distant mountain peak. 

But remember every mountain can be conquered, one step at a time.

I believe that with passion, consistent effort and wise advice you can succeed in your business.

I wish you all the best and I’ll see you next time.

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by Phil Latz

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Hi, welcome to this latest blog of my finance series that I hope will help you become more successful in your business.

As a business owner myself for many years, I understand the challenges that you face.

The theme of this series is how to maximise your profit.

One of the quickest and easiest ways to destroy the profit of your business is to give your customers excessive discounts.

I’ve seen this so often with clients that I’ve coached and with other businesses that I’ve observed through my years in business media.

Notice that I didn’t just say ‘discounts’, I said excessive discounts. In almost every business, there will be a time and place to discount.

Here are the most common scenarios where I would endorse discounting.

Firstly, when you’re getting something in return that boosts your profitability. For example, if it entices a customer to buy in bulk, so your costs per unit fall, it can pay to offer a carefully calibrated discount.

Secondly, when you’ve made a mistake in your stock purchasing or the market has moved and demand has dropped and you find yourself with old stock, you’re better off to liquidate it and move on. The same applies with seasonal stock or dated stock.

But far too often, businesses discount without being aware of the damage it’s doing to their profitability.

Many times as a customer I’ve been offered a discount when I haven’t even asked for one!

I might have been perfectly happy to pay full price. That business has just robbed itself of vital profits.

How much profit?

More than you probably realise.

If you discount a product by 10% then you have to sell 10% more to make up for the shortfall in profit. Right? Wrong!

The answer depends upon what mark-up you started with on the product, but it could even be that no amount of additional sales will make up for the lower profit margin. It comes down to a mathematical calculation.

For example 

If your profit margin is 50% at the full retail price and you discount by 10%, then you will need to sell 25% more products just to earn the same total amount of profit.

But if your profit margin is 20% at the full retail price and you discount by 10%, then you will need to sell 100% more products, in other words twice as many, in order to earn the same total profit.

It gets even worse because selling more products usually means more work, more stock, more space, more cash tied up and more headaches.

So if discounting hurts profitability so much, then why is it so commonplace?

Here are four reasons.

Firstly, few business owners fully understand the full cost of discounting.

Secondly, especially in the scenario I mentioned previously where I’ve been offered discounts without even asking for one, sales-people have inadequate training, or perhaps are on a bonus system linked to sales rather than profits. Remember sales (or turnover) is vanity and profit is sanity.

Thirdly, many business owners are afraid to charge what their products and services are truly worth. The bottom line is they’re choosing to work harder for less profit than risk rejection or accusations of being a ‘price gouger’. We all want to be liked and popular with our customers, it’s human nature. But it’s possible and better, to be both popular and profitable.

Fourthly, businesses think they can gain market share and ‘hurt’ their competitors by undercutting them.

I’d like to deal with this fourth reason first. It’s something I saw every month in the during my first 25 year season in the media industry from 1989 to 2014. During this time we founded and published several consumer and trade magazines.

Our competitors would consistently discount their advertising rates to get the sale. Often they were half the price per page that we were charging. 

Surely we had to match them? No! We always held our ground and stuck to our rates card. We decided that we were prepared to lose the sale rather than give any customer a special deal.

Over those 25 years, we saw many of these discounting competitors come and go, but our titles were still going strong and in part because of the attractive advertising rates we were achieving, we were able to sell our business to a blue chip publisher at a very fair price.

Therefore I would argue that competing upon price only sets you up for a race to the bottom. In races such as these, only one or two of the biggest players, with the deepest pockets end up winning. They’re usually publicly traded companies who gain market share by driving out the independents.

You’ll never win a price war against these guys, so what can you do?

You need to sell on value not price. Customers may tell you they want the lowest price. They may even think this themselves, but often that’s not true.

Many purchases, especially consumer purchases of discretionary items, are far less price sensitive than you may imagine.

I remember reading an example of a cosmetics company that had a moderately successful product. Later they sold their business to a larger competitor. The new owner halved the size of the product and doubled the price, a 400% price increase per gram. So profit per unit went through the roof but interestingly, sales volume went up too!

Apparently, consumers were suspicious at the old price that the product was inferior. When it was more expensive, they felt more reassured.

Was the new business being unethical? I don’t think so. The aim of a business is to maximise profit. If the consumer thinks they’re getting value and they’re not being deceived or coerced into buying then where is the victim?

I understand that in competitive markets, you will come under pressure from consumers to offer a discount. But even when you feel compelled, try alternatives that cost you less.

For example, offer to throw in an accessory at half price. Preferably this upsell product is something on which you already have a high margin.

Or offer an extended warranty, free first service or some other form of value add, that gets the customer back and gives you opportunity for further sales and relationship deepening.

In summary, discounting is a sign of desperation that can lead to death, particularly in small to medium businesses.

You’re far better off working hard on all of the aspects that give your customers better value. The list of possibilities is long. Everything from better sales staff training, through to better stock displays and product information, through to carrying a better product range, stronger guarantees, quicker delivery and more.

Ultimately, even if they don’t fully realise it, customers buy on value, and price is only one of many factors that determine value for money. Value is not as cut and dried a measure as it might sound. Emotion has a strong influence of the perceived value of many products and services.

So please be strategic about when and why you discount. Don’t destroy your profits for no good reason!

I believe that with passion, consistent effort and wise advice you can succeed in your business.

I wish you all the best and I’ll see you next time.

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by Phil Latz

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Hi, welcome to this latest blog of my finance series that I hope will help you become more successful in your business.

As a business owner myself for many years, I understand the challenges that you face.

The theme of this series is how to maximise your profit.

Today I’d like to show you five key ways to increase your profitability.

I’d like to start by making it clear that the content of this particular blog is not original. 

I was first taught this content many years ago when I attended a seminar run by the business coaching company, ActionCOACH. They have been teaching this to many thousands of business owners for decades, because it works. 

Years later I was a contractor for almost two years within an ActionCOACH business coaching franchise so I saw the effectiveness of this content first hand.

I’m sure that you’d like to increase the profitability of your business, otherwise you would not be investing time in your self-education right now. 

But how exactly can you increase profitability? 

By focusing on five key variables. If you can improve any one of them, your profitability will increase, but if you can improve more than one, then your profitability increases exponentially. That is, to the power of two, three, four or five, depending upon how many of the five you can improve.

These principles apply to just about every business, regardless of what product or service you sell and regardless who you sell these to.

Leads

The first of these five variables is your number of leads. You can’t sell to someone until they become aware of your business and make contact with you in some way.

When they do, they’re a lead.

There are many ways to generate leads and I’ll go into more detail about this and the other four variables in future episodes. But for now, here are two tips to increase both the quantity and quality of your leads. 

Firstly, despite all of the technology available to us these days, nothing beats word of mouth, especially if it’s a personal referral from one of your existing customers. The best way to get referrals is to ask for them. 

I know that might feel awkward at times and go against our natural instincts, but a genuinely satisfied customer is usually glad to oblige.

Secondly, your leads are a valuable asset, even before you’ve converted them into customers, so make sure you’re capturing their information in a good customer relationship management system, which you’ll often see referred to by its initials, a CRM system.

Conversion Rate

Our next variable is conversion rate. Your number of leads, time your conversion rate, will equal your number of customers. You measure your conversion rate as a percentage.

For example, suppose you have 100 leads and your conversion rate is 50%, then you’ll end up with 50 customers. If you can use better sales and marketing techniques to improve your conversion rate to 55% then you’ll have 55 customers.

Number of Transactions

The third variable is the number of transactions. 

What can you do to have your customers buying from you more often? 

Once again, there are many ideas that might work for you. Some tried and true methods include loyalty cards, systematic follow up communication with your customers to tell them about specials and new products and broaden your product range.

Value of Transactions

Next comes the average dollar value of each sale. What can you do to have your customers buy more from you each time they transact with you? The classic example often used to illustrate this point is McDonalds team members being trained to ask, ‘Would you like fries with that?’

Another equally basic way to increase the average dollar sale is to train your team never to say, ‘Is that all?’ but instead, to keep asking, ‘Is there anything else I can help you with?’ and not to stop until the customers says, ‘No, that’s everything!’

Once you’ve multiplied your number of customers by your number of transactions per customer and average sale value per transaction you arrive at your total sales or turnover.

But as you’ll hopefully remember from one of my previous episodes, turnover is vanity and profit is sanity, so we need to multiply this total by one final variable. That is your profit margin.

Profit Margin

For the purposes of this example we’ll say it’s your gross profit margin, that is, your sale price minus your cost of goods sold. But you could do the same exercise using your net profit margin, which will be a lower percentage because it takes into account all of your expenses.

Sales times profit margin equals your profit, which, as I’ll continue to say, equals sanity!

It’s only your net profit after tax that is truly your money that you can extract from your business and spend on whatever you like without draining your business of its cash.

How can you increase your profit margin? Once again, we’ll go into more detail in future episodes but two of the best ways are to increase your prices or cut your costs, or both!

In summary, we’ve now identified the five key variables: Your number of leads, conversion rate, number of transactions, average dollar sale and margin.

This is where the magic of exponential equations, also known as compounding, comes in.

If you were to improve each variable by 10% how much would your profit increase by?

Many of you might answer, ‘By 50%’, which is an understandable guess, because 10% added five times equals 50%. But that’s not the right answer.

Each increase is multiplied by the one before. An increase of 10% equals 1.1 so it’s 1.1 multiplied five times, which is 1.1 to the power of five. The answer is 1.61 or a 61% increase in profit. 

The greater you can increase each variable, the greater effect this exponential equation has. For example, an increase of 20% to each variable would result in an increase profit of 1.2 to the power of 5 or 2.48, which is a 148% increase in profit.

In future blogs we’ll be looking at all five of these variables in more detail and ways that you can improve your performance for every one of them.

I believe that with passion, consistent effort and wise advice you can succeed in your business.

I wish you all the best and I’ll see you next time.

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