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Understanding the nuts & bolts of your business 24 January, 2007

Posted 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.

Greville Commins

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Comments»

1. Mike Blain - 22 March, 2007

So..I see a problem but no solution excpe to say change the problem and why the problem should change. It would be more helpful to show hoe to change the problem.


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