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3 Things Every Small Business Owner Should Know
Instructor: Gene Siciliano-Founder and President of Western Management Associates, a financial management consulting firm. WMA has served small business since 1986.
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1 - How much profit do you really make on your 10 largest customers? Consider how often they buy, how large their orders are, and how well they pay. Those are the obvious things. But now consider also the special price concessions you might give them. Do you extend special services to them in delivery, warranty support, or other customer service? Do you extend payment terms, wait longer before you call Accounts Payable, process special turnaround orders or accept smaller orders than you really want to? Each of these extras cost your company money or time (that is, money) – both real costs of servicing that account. This is not to say you shouldn’t do it, but you need to know how profitable that account is in order to make the best decision for your company. The largest customer isn’t always your most profitable. Are you giving those concessions because you’re building a relationship that will pay off “later?”
2 - How much does each product you sell really cost you? If you lose money on every product you sell, it’s really hard to make it up on volume. It’s amazing how many companies figure their Gross Profit on a product by deducting only the direct costs of manufacture or purchase from the selling price. Often this is calculated for an entire department, rather than for the individual product. Unfortunately, this is rarely the true cost of a product you sell. Consider the costs to receive, package, warehouse, and deliver the product. How about servicing the warranty on its performance? And then there are overhead costs related to having the facility ready and manned for your operations, from the lights to the janitorial service and the maintenance contracts on your equipment. If one of your products requires a disproportionate amount of overhead costs, an average overhead calculation for your company as a whole will never give you the right answer. Your most popular item could be a loss leader without you even knowing it.
3 - How quickly does your inventory turn over during a year? Funny things happen to inventory that doesn’t move out quickly. It disappears. Or it breaks. Or it becomes old, obsolete, or generally unusable. Or it just gets misplaced or lost, to be found soon after you’ve bought more. Or the market price comes down and you have to mark it down to sell it. All of these results take money out of your pocket. The first step in preventing all these things from hitting your bottom line is to know how quickly your inventory turns and to note any changes in that rate. This is step one in preventing inventory losses, followed closely by refining the overall turnover rate to an item-specific turnover rate, at least for high cost items. Why the detail? Because expensive items that don’t move may be hidden by fast moving items that have much lower margins.
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