Understanding the nuts & bolts of your business 24 January, 2007Posted by varoom in Business Plans.
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Recently a few business plans I have read gave very little information of the financial basics of the business with regard to the product on offer. Potential investors need to understand the basic profitability of your product as well as the basics of your business.
The analysis of product margins and more importantly gross margin needs to demonstrate the profitability of the product. Understanding the breakdown of margins, where you make your profits in the whole process of manufacturing and bringing your product to market.. I met a company who could not explain how their expected mark up on their product was 25% but the finances showed a Gross Margin of 46%. Despite the fact that I believed their mark up for their product offering was too low the Gross Margin was poorly understood. This confusion will colour the view a potential investor has of the business. If the business owners cannot explain how the profits in the business are derived it does not bode well for profitability.
Good information on your product manufacturing costs, who will manufacture, where, what kind of volumes and the impact of volume on cost. Do you have minimum order quantities which force you to take inventory in excess of your run rate of sales? How much capital will be tied up in inventory and what turns ration (how often you sell the inventory in a year) do you expect. Your inventory may also be driven by the manufacturing lead time, if your customer demand is shorter than the lead time you will need to hold inventory. How does this manufacturing lead time impact inventory levels?
A comparison versus competition is key, how does your cost base compare, how profitable is the competition, how can they respond when your product enters the market? What volumes are they manufacturing at today, is that a competitive advantage?
Market price, customer sensitivity to your product pricing, can you pitch at a higher price level? Every percentage improvement in price goes directly to the Gross Margin and is profit. Another, rarely considered, impact on margin is the cost of handling and serving a customer. How much does it cost to acquire a new customer, how much effort must be expended in dealing with and winning business from each customer and finally what cost impact does post sales support have. Not every customer is the same, requiring the same level of support and hence some customers are more expensive to deal with than others.
Focussing and understanding in detail every step from manufacture to final delivery is key to maximising profits.
Don`t leave your Goals & Strategies on the shelf gathering dust 17 January, 2007Posted by varoom in Business Plans.
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Having goals and strategies for your business is important for several reasons but most importantly to guide your business in day to day decisions. If you have to make a business decision how do you know if the answer is the best one for your business? What you should do is ask, if I take this decision does it help me achieve the goals of my business? This check will ensure you take the opportunities that will reinforce the chance of success of the business and its goals.
In my role mentoring start up companies I am asked frequently if a new wonderful opportunity should be taken by the business. These opportunities can be short term but attractive financially. I always ask, how does this business help the company achieve its business goal? Is it consistent with the strategy needed to achieve the goals or will this opportunity distract or take resources away from achieving the main goals? I know this is very easy for an independent person, outside the business, to ask. But someone should ask, and after asking the question if the decision is still to pursue the opportunity then that’s the responsibility of the business management.
On occasion, however, these new opportunities can force a rethink of the goals and strategies and whilst sometimes the right thing to do, these changes must be made carefully. Changing the goals and strategies on a regular basis is the same as having no strategy at all.
If your business involves product development and you are on a long term development path, changes in short term priorities could have a detrimental effect on the development and could have long term business impact.
Having the right Goals and Strategies should make decision making over the short term easier if you use them as they were intended.
Don’t leave your Goals & Strategies gathering dust on the shelf!
Never undervalue what you offer 9 January, 2007Posted by varoom in Selling.
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Increasingly I’m meeting startups who undervalue what they have on offer. On meeting early customers they get influenced by two things, the enthusiasm to achieve early business and the negotiation tactics employed by experienced customers.
Once you set the level of expectation and value on your product offering it can be very hard, if not impossible, to lift it back up in the future.
Also the value you have invested in your product is not the same value to your potential customer. In order to effectively negotiate you need to know what your product is worth to the customer.
Questions to ask are, can the customer create the same product with resources he has today? How does the cost of development inside your customer compare to the offering you have at the price you are selling it at? Is a similar product available elsewhere? How do the prices compare? Are there some features not available elsewhere, how valuable are these features to your customer?
Is time to market a factor in the equation? If the customer is late to market he often loses much more than the cost of your product in sales. Your product is available now any delay in buying could cost serious money.
What about cost basis? Can you deliver the product at a more competitive cost than competition both internal and external, If so, what is that cost to the customer? The cost of internal or other external options may be much higher in the eyes of your customer than your own internal cost.
What about opportunity cost, if the customer buys from you he can use his resources for some other profitable activity. Do you know what else he could do? What are your customers’ strengths and weakness’?
In summary be careful to assess the true value, in the eyes of your customer, of your product before you set the price.