Sales and profits may be up in your business this year, but is it sustainable in the future? To find out, ask yourself these fundamental questions to help you identify the answer.
1. What Pain Does Your Business Really Solve for Customers?
What is your unique selling proposition that differentiates you from competitive offerings? What does that pain cost the customer if it is not fixed? Remember that people buy when they have a problem and money to solve it. Why should customers buy your solution instead of someone else’s? What makes your offering better than doing nothing at all?
2. How Does Your Business Really Generate Income?
Look at your monthly profit and loss statements that come from your accounting system. Do you understand every number? Can you tell where the money is coming from and where it is going? Which parts of the business are truly profitable and which are actually losing money? It is critical for you to understand where the financial leverage is in your business.
3. What Are Your Prices Based On?
Do your prices compare only to what competitors charge for similar products, or are they only set on what “you think” customers will pay? Prices should not be based exclusively on their cost, but rather the value to the customer. Do a sensitivity analysis by raising prices to see if you retain most of your business.
Customers may actually pay more for the similar value. What are the gross margins on different products and services you sell? Surprisingly, the highest priced products may not always have the best gross profit.
4. What Does the Competition Have That You Don’t?
If you were leading your competitor’s company, what would you be most proud of? Now, as the leader of your business, how can you grab back the advantage in the future? This requires a very honest assessment of your company’s strengths and weaknesses. Get help from an outside advisor to do this effectively.
5. How Does Your Business Generate Cash Flow?
Do you look at a cash flow statement every month? Do you understand what each number means? In the short term, look at the beginning and ending cash balance of your main operating account. Did cash increase or decrease during the month? Do you know what items increase your cash and which ones deplete it? Have you forecast future cash flows to ensure enough money to run your business? Talk to your accountant for help. Most of this information can be generated from your accounting system.
6. Are You Behind in Collecting Your Accounts Receivable?
What is the average number of days it takes to collect money from your customer? This is commonly called “days sales outstanding” (DSO). Who are the biggest late payment offenders, and why do you still do business with them? Similarly, are you losing trust with your own vendors by paying your accounts payable late?
7. Where Do Managers Spend Their Time?
Do they work on revenue-generating activities or have they become administrative overhead? Are they leading their teams to be more productive? Examine what other non-income generating people do with their time. What people productivity can be leveraged as the company grows? Most employees in profitable companies focus their time on activities that either generate sales or retain current customers.
8. How Are Decisions Made in Your Company?
Most small business owners have a hard time transitioning from a hub-and-spoke model (i.e. where they make all the key decisions) to a hierarchical one where decision making is distributed. This transition is a key requirement in order to sustain the future viability of the company. To identify your structure, think about who made the last three key decisions in your business. If it was you, it needs to change.
9. How Long Does an Employee Usually Stay With Your Company?
Team member churn can cost up to 30% of the salary of that employee. It is not only expensive, it can hurt the morale, culture and productivity of the company. If the average employee stays two years or less, there is a problem. Either the right people are not being hired to the team or they are not being positively supported while they are working.
10. How Does Your Business Become More Profitable?
Long term sales growth without making a profit makes no sense. To grow, should you add more similar clients, or just add more products to sell to the same clients? Does stopping the sale of unprofitable products or the servicing of unprofitable customers help the bottom line? Do you have the cash resources to grow?
All of these questions can help you think about your business in a new light and help you weed out problems before they become too big to fix. For more information on how to create a successful company, read our article about building the right team.