Having spent many years working as an accountant I know a thing or two about Balance Sheets. The most important of which is that they should balance. Ask any accountant about trying to find the error in an extended trail balance (the precursor of the Balance Sheet and Profit & Loss account) and they will regale you with lots of stories of woe. Balance sheets are a snapshot, at one point in time, of a business’ position. Assets on one side and liabilities on the other, hence the term Balance Sheet, although nowadays they are presented in a portrait format with the assets at the top and liabilities at the bottom. The liabilities can be split in two, those owed to others and those owed to the owners of the business. The thing that makes it balance, provided there are no mistakes, are the retained profits for the year. That is a good thing because it allows me to segue into talking about the Profit and Loss account and what I really want to get to, which is losses. Sorry about the circuitous route; however, I wanted to link back to the previous blog (Balance), you will see why later, and Balance Sheets seemed the best way.
Businesses make losses and sometimes that cannot be avoided, start-up situations for example or coping with a change in circumstances. However, generally losses are a bad thing and to be avoided; there are either too many costs on one side of the scales or too little revenue on the other side or both. Often when management realises there is a problem, they cut costs across the board, perhaps slashing budgets by 10% (most of the time that excludes board salaries) which is not a good idea. It is like deciding you need to lose weight and cutting off a toe, a finger, a snip out of each ear, a bit off your nose, a slice off each buttock and … I think you’ve got the idea. If the business survives the cuts and blood letting it may limp on into the future, but nothing has changed. Albert Einstein said, “Problems cannot be solved with the same mindset that created them.” Or to put it another way “You don’t drown by falling in the water; you drown by staying there.” Edwin Louis Cole.
If things are really bad and you are in deep, then the existing team are unlikely to have the right mindset or the ability to pull the business out of the water, or whatever mess it is in. You need outside help; time to call in the FBI. No, not the American law enforcement people, I mean consultants who have Financial and Business Intelligence. However, be warned, before they get their badge the American FBI agents are extensively trained at Quantico, anyone can call themselves a consultant without any training or qualifications. When you get your outside help, you should look for 4-weight people, not 6-weight people. (See previous post). 6-weight people, while not ideal, will help you, provided they are not charlatans, they will help you reduce the right costs and not cut off your nose. They might demand a metaphorical pound of flesh (professional fees can be expensive); it will be worth it if they have saved the business.
4-weight people will understand your business, the markets it operates in and its processes. They will also understand the markets it could operate in and the processes it could use. They are not confined by convention and what is supposed to happen on different sides of the scales. They may well suggest reducing sales to improve your businesses performance. Radical? Yes. Sensible? Yes. Some customers are just too costly to service; very often the time taken dealing with queries, meetings, making changes, etc is hidden in overheads or general costs of sales and not compared to the revenue that individual customer brings in. Each customer should be weighed in the balance and, if found wanting, cast adrift before they can sink you.
When I had the outdoor goods distribution business, we used to rank customers using a scoring system that included possible sales volume and the cost (including hassle) of doing business with them. We had four levels, Diamond, Gold, Silver & Bronze. There is another class, Lead (those that will weigh you down) but they never got into our CRM system. Obviously, we devoted most of our time and effort to the Diamond Geezers, although we also spent time encouraging our customers to move up the rankings. One of our Silvers was in danger of becoming base metal, they would leave it to the last minute to order and phone through in a panic wanting a delivery the next day. They usually called after our normal deliveries had gone out, so it meant a special trip to the courier’s depot, which was time consuming and expensive. I analysed their orders and suggested a fixed monthly delivery of stock that would be adjusted if things got out of kilter and that we would wait for payment if their stock level got too high. The result, my admin and delivery costs went down, their sales of our stuff to the public went up (they no longer had times when things were out of stock), so our orders from them went up. That customer moved from Silver to Gold.
Customers: if you can’t make them work for your business ditch them. Sales are vanity, cash is sanity and profit is the purpose of business.