How to Recognize a Business Opportunity

Whether you are contemplating a new business or want to re-energize or expand your current one, you need to be able to recognize a business opportunity when you see one. You have probably had visions of one— customers buy things it cost a fraction to produce and you become fabulously wealthy. A businessperson’s dream come true! However, the reality is good business opportunities are hard to find.

Even if you think you have found one, it takes risk, skills and ability, and timing to take advantage of it. Risk attaches itself to any business opportunity. Therefore, objectively analyze the feasibility of your concept. Successful businesses have a product or service people want, at a price they are willing to pay, and it is easy to get. If you offer something you think people want without knowing it, you are risking more than necessary.

Let’s say you think an opportunity exists for a new restaurant. There are a number of things you can do to test your assumption. First, find out what is happening in the overall industry. Trade associations, magazines, and current books can give you an idea of current demand. Examples are the trend towards small, highly specialized food establishments (e.g., pretzel, cookie, ethnic, etc.) and mixed-use restaurants (e.g. play areas, movies, games, Internet, etc.). You can also gain a lot of information through observation. Stay current with local news and business periodicals and gain insights from the perspective of other businesses. You should also gather statistics on consumer behavior for your type of business. For a restaurant, you need to know how often people eat out, how much they spend, common personal or demographic characteristics, and preferences in dining atmosphere or services, etc. From there, you can evaluate your geographic area and see how well competitors are filling those needs.

Once you have gathered information, you can form a hypothesis about supply and demand. A business opportunity could be lurking somewhere between what people want and what they are getting. Find out how they are currently meeting their needs. For our restaurant example, you might find grocery stores have designated a special department or menus of established restaurants have been updated. Your challenge is to find out how well needs are being met and where people go to meet them. If people need something, they will find it. Locating establishments on a map will give you a geographic sense of how far people must travel. If convenience is a significant buying factor, you will be able to identify underserved areas. Once you complete this analysis, you will be in a better position to develop your own competitive strategy.

At the heart of your competitive strategy is your distinctive competence. Your distinctive competence is something (e.g. a skill, specialty, level of service, etc.) that sets you apart when compared with competitors. This differentiation and your pricing strategy define your business in the minds of consumers. A sound competitive strategy depends on your knowledge of the customers and their needs, the ways your competitors meet their needs, and the perceived value of the goods and services you offer. It’s what separates a business opportunity from a good idea.

It takes money to make money, so that means every business opportunity will have costs associated with it. Take the time and effort to know exactly what resources are required to optimally run the business. Capital expenses include hard assets like equipment and beginning inventory. It may be difficult to find a site designed for your purpose; therefore, you must anticipate costs associated with renovating a space. Be sure not to underestimate your working capital needs. Working capital is used to replenish inventory, pay employee wages, and finance other continuing operating expenses. You will always have a need for working capital because the timing of cash coming into the business does not always match the timing of cash going out. It takes most businesses a long time to achieve a predictable profit. Be sure you know if you have the financial reserves to cover the costs of startup (or expansion) and operation. If you must leverage your own money with a loan, be prepared to offer sufficient collateral to secure it. A true business opportunity will generate sufficient sales to support the cost and provide a profit.

There are many resources to help you analyze a business opportunity. You can find books on the above-mentioned topics, reference materials, and access to periodicals and the Internet. When you have completed your initial analysis, take advantage of no-cost, confidential business counseling from SCORE or the Washington Small Business Development Center. Advisors will help you evaluate your findings and assist you with the development of your business plan.

What SBA Seeks In A Loan Application:

First, the Small Business Administration (SBA) is a federal agency and does not make loans, SBA guarantees loans made by financial institutions. Under the guaranty concept, the business applies to their local business lender. The lender decides if they will make the loan internally or if the application has some weaknesses which, in their opinion, will require an SBA guaranty if the loan is to be made. The guaranty assures the lender that in the event the borrower does not repay their obligation and a payment default occurs, the Government will reimburse the lender for that portion of the loan guaranteed. However, the borrower remains obligated for the full amount due.  Additional informatioon on SBA loan programs and requirements can be found at

http://www.sba.gov/

SBA 7(a) Loan Guaranty Program:  Most SBA business loan guarantees will be one of the various 7(a) guaranteed loan programs depending on the amount to be borrowed. A 7(a) loans can be used for most business purposes, up to a maximum guarantee of $1.5 million, with a typical maturity of 7 to 10 years depending on how funds are used.

504 Loan Program:  The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. Loan made under the 504 program can be A 504 Loan is made by a Certified Development Company who work with the SBA and private-sector lenders to provide financing to small businesses. 

Typically, a 504 project includes a a private-sector lender covering up to 50 percent of the project cost, with the  504 loan from the CDC covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business being helped. The advantage of a 504 loan is a longer maturity and a lower interest rate on the 504 portion of the loan. The business/owners must contribute at least ten percent of the project total cost.

SBA Guarantee Eligibility

Repayment ability from cash flow of the business is a primary consideration in the SBA loan decision process but good character, management capability, collateral, and owner's equity contribution are also important considerations. All owners of 20 percent or more are required to personally guarantee SBA loans.

All businesses must: meet SBA size standards, be for-profit, not already have the internal resources (business or personal) to provide the financing, and be able to demonstrate repayment. Certain variations of SBA’s 7(a) loan program may also require additional eligibility criteria. Special purpose programs will identify those additional criteria.

Maturity  Maximum loan maturities have been established: twenty-five (25) years for real estate and equipment; and, generally seven (7) years for working capital.

The maximum maturity of loans used to finance fixed assets other than real estate will be limited to the economic life of those assets - but in no instance to exceed twenty-five (25) years. The 25-year maximum will generally apply to the acquisition of land and buildings

Equity Investment  Business loan applicants must have a reasonable amount invested in their business. This ensures that, when combined with borrowed funds, the business can operate on a sound basis.

Strong equity with a manageable debt level provide financial resiliency to help a firm weather periods of operational adversity.

Determining whether a company's level of debt is appropriate in relation to its equity requires analysis of the company's expected earnings and the viability and variability of these earnings. The stronger the support for projected profits, the greater the likelihood the loan will be approved. Applications with high debt, low equity, and unsupported projections will be denied.

Earnings Requirements  A company must be able to meet all its debt payments, not just its loan payments, as they come due. Applicants are generally required to provide a report on when their income will become cash and when their expenses must be paid. This report is usually in the form of a cash flow projection, broken down on a monthly basis, and covering the first annual period after the loan is received.

Applicants should write down all assumptions which went into the estimations of both revenues and expenses and provide these assumptions as part of the application. For new or expanding business with anticipated revenues and expenses exceeding past performance, the necessity for the lender to understand all the assumptions on how these revenues will be generated is paramount to loan approval.

Working Capital  Working capital is defined as the excess of current assets over current liabilities. Working capital is essential for a company to meet its continuous operational needs. Its adequacy influences the firm's ability to meet its trade and short-term debt obligations, as well as to remain financially viable.

Collateral  To the extent that worthwhile assets are available, adequate collateral is required as security on all SBA loans. However, SBA will generally not decline a loan where inadequacy of collateral is the only unfavorable factor.

For all SBA loans, personal guarantees are required of every owner with at least a 20 percent share of the business , plus others individuals who hold key management positions. Whether or not a guarantee will be secured by personal assets is based on the value of the assets already pledged and the value of the assets personally owned compared to the amount borrowed. In the event real estate is to be used as collateral, borrowers should be aware that banks and other regulated lenders are now required by law to obtain third-party valuation on real estate related transactions of $50,000 or more. SBA may require professional appraisals of business and personal assets, plus any necessary survey, and/or feasibility study.

Resource Management  Managerial capacity is an important factor involving education, experience and motivation. A proven positive ability to manage resources is also a large consideration.

Preparing A Loan Application. Obtaining loan approval is easier when the business loan application has been adequately prepared. This usually includes a current business plan, financial history with at least three years of federal income tax returns, personal financial history including credit reports and and credit scores, legal documents such as partnerships, leases, articles of incorporation, market research to support sales projections, sources of owners equity, lists of collateral and any other information the lender may require.

Seven Customer Retention Strategies

Do you direct all of your energies to getting new customers? If so, you may want to take a closer look at the source of your sales since it is very likely that 80% of your business is coming from repeat customers. If you  find that 80% of your business is coming from 20% of your customers, you may want to consider some strategies for staying in touch with those customers! Retaining customers and serving them over their lifetime can mean thousands of dollars for your business.

Some practical ways to develop action around customer retention strategies might include some of the following steps: 

1 Communicate with your existing customers on a regular basis.

2 Show your appreciation for their business and nurture customer loyalty.

3 Look for ways to build trust between your business and your customers.

4 Don’t make it easy for your customers to switch to the competition.

5 Expand product lines to provide more products or services for your customers.

6 Anticipate the changing needs of your customers.

7 Use cross-selling (selling other parts of your line to the same customer) and up-selling (selling more per order) to increase the average sale to each customer.

If you’ve lost customers, you may want to develop some strategies for getting them back. In order to implement a strategy, you need to have a database of previous customers. So, if you don’t keep a database, it stands to reason that that should be the first step in your strategy: Develop a database!

Next, you need to remind them about your business and tell them you want them back! However, you may first need to find out why they stopped coming to your place of business and, if you failed to meet their expectations, you need to make it right.

You’ve already invested a lot of money in the customers you retain and the customers you have lost. For that reason alone, putting some additional energy into retaining customers, and reactivating lost customers, makes sense for your business.

Do You Have Effective Internal Financial Controls in Your Business?

One of the very first private consulting jobs that I took on, several years ago was for a well-established company in the Midwest.  Day-to-day management of the company fell to the owner’s wife when he suddenly passed away. Since she was new to the daily operations, she began to scrutinize the financial information more carefully as a means of educating herself on the business financial condition. It didn’t take her too long to know that something wasn’t quite right but she couldn’t put a finger on the problem.

We worked together to analyze costs, analyze pricing and develop strategies for positioning the business to be put up for sale. Meantime, she shared with me that she had a concern that one of her employees was stealing from the company. So we turned our focus to the development of internal controls while we tried to identify whether or not her concern was valid. As it turned out, the tightening of internal controls caused the person in question to leave the company after over 20 years with the business. The owner, and her sons, were completely devastated to find out that the employee had been stealing from them consistently for many years. This employee was highly valued by the business and was considered almost like family after many years of service. The moral of the story is simply that no business is too small to institute effective internal financial controls.

How can you begin to develop controls? First you need to identify the areas that are high-risk in your business. High-risk areas may include: Cash receipts and disbursements, customer credit and collections (writing off bad debts), purchasing and storage of inventory, payroll (including worker’s compensation insurance fraud). Under no circumstances should an accountant, bookkeeper, or the Controller of the business be given check-signing authority. Fraud can easily be concealed if this person has authority to sign checks. The owner/manager should sign all checks. If there are multiple owners, at least two signatures should be required. Do not create a signature stamp that can be used in your absence.

Following are other recommendations:

• In a small company, if you cannot separate duties to provide a check and balance system, consider job-sharing through a cross-training arrangement.

• Require that employees who work in high risk areas take vacations. Pay attention as to whether employee life/styles seem to match what you may know about their salaries.

• Limit access to accounting records and year-end entries.

• Make surprise audits and inspections

• Discuss computer controls with your accountant or a computer security specialist

• Be sure that you pay attention to the legal aspects of internal controls. Be sure any controls that you put in place do not violate the privacy rights of employees or customers.

Article written by Susan Hoosier, Longview Small Business Development Center  To locate your local SBDC advisor please visit the SBDC web site http://www.wsbdc.org/

Taking Your Business to the Next Level

“How can I evaluate new business opportunities?” “How can I determine whether to sell one of my three businesses?” “How can I better plan for future contingencies?” “Will I be able to sell my business in ten years and afford to retire?” These questions and others like them are ones that small business owners should be  asking themselves. As often happens, we become complacent when all is going well. We can breathe--and even take a vacation! However, businesses often take on a life of their own and may be headed down a path that is different from what the owner envisions. The owner just hasn’t told the business of his or her vision. Taking your business to the next level is that type of planning. It asks: “Where is my business going? Where do I want it to go? How can I get there?”

The First Step—Your Current Reality

To begin this type of planning, you need to know where you are—what is your current reality? This involves some data gathering and analysis. While this will be different for each business, there are four main areas you’ll typically need to look at to assess your current situation: finances; marketing; employees; and facilities. Let’s briefly look at some of the issues in each of these areas.

• Finances: Do you prepare monthly financial statements? If not, then this is the place to start. If you do, do you analyze them? What do you see when you look at trends in revenues and major expense categories? Are they changing? Is the change positive or negative? By calculating a few standard financial ratios, you can better understand what’s going on. You will also gain an idea of how your business compares with others in your industry.

• Marketing: How much do you know about your customers? Who are they? Where do they live? What other demographic data do you know about them? What influences their buying decisions? Has your customer base changed over the years? Is one type of customer more profitable than other ones? Who are your competitors? What are their strengths and weaknesses? What is your competitive advantage—why should customers come to your business and not the competition? What about your prices—are they too high or too low?

• Employees: Do your employees know what you expect of them? How do you communicate this? Can they take over for one another when necessary? Do they know what values your business is run on? What is your employee turnover rate? And why do employees leave?

• Facilities: Is your space adequate? Can you expand? How would your customers and employees evaluate your location and facilities?

The Next Step—Creating a Vision and a Plan

Where do you want to go and what do you want your business to accomplish? Now that you know where you are—what the current reality is—you can begin creating a vision of what you’d like to see as a future reality. Your vision can be broad in scope, including personal goals and goals for your community. Now ask yourself what part you want your business to play in fulfilling that vision. Your answer to that question becomes your mission statement. Armed with a firm understanding of your current Taking Your Business to

the Next Level  reality and what you’d like to create as your future reality, you can prepare an action plan that will help you to realize your vision.

How the SBDC Can Help

At the SBDC, we work with small business owners to help them gain an understanding of their current situation, create a vision, and develop a plan to get there. For example, a few years ago we worked with an entrepreneur who owned three businesses. He had a good understanding of his current situation and he had some components of a vision: he wanted more personal flexibility to enjoy life as he got older, and he wanted to be able to take advantage of opportunities to sell one or more of his businesses. We worked with him to fine-tune that vision, and we helped him to develop not only an action plan, but also a series of analytical tools for decision-making.

Businesses are never standing still, they are either moving forward or backward. By using the approach outlined above, you can move your business forward to the next level of success. Let us know if we can help you with this.

Kathleen Purdy is the Center Director of the Olympic Peninsula Small Business Development Center (SBDC),  This article was first published in Olympic Business Journal

8 Ways to Increase Your Cash Flow in a Cash-Crunched Economy

Every day I hear about cash flow problems from business owners. In this economy, most of us are having cash flow concerns. I am hearing that sales of most small retail businesses are down 10% to 20% from

last year. If you don’t understand the different ways to increase your cash flow, you can get stuck thinking you have no options. If you are having cash flow concerns, chances are it is difficult for you to get a loan  from the bank.

My clients continue to come up with inventive ways to solve their cash flow concerns. I wanted to share some of their stories in the hope it will be helpful to you. I’ve broken these down into 8 ideas to help you increase your cash flow:

1 Create a positive cash flow cycle. The cash flow cycle refers to the difference in timing between when you pay for products or payroll and when you get paid by your clients. A negative cash flow cycle means you pay out before you get paid. A positive cash flow cycle means you get paid before you have to pay out. One client recently asked her vendors for 30 day terms and got it. It put her into a positive cash flow immediately. Other clients have started asking for ½ down before they start the job and some clients offer small incentives for paying accounts receivables early.

2 Increase your average sale. If you can get your customers to buy more of your stuff, for more money, and more often you will increase your average sale. When your average sale goes up more dollars go into your bank account. I have one retail client that started carrying more upscale products, increased her prices on some items, and bundled or packaged some products together. She saw an immediate improvement in her cash flow.

3 Increase your sales and marketing efforts. This is a hard time for building supply companies. One client opened a building supply company just before the real estate market slow down. Oops! So, he took a gamble and advertised on T.V. It was hard to spend the money, but the results are that he has been increasing sales every month since he opened. Another client doubled her sales force and has increased sales every month of the downturn. There really is a lot of opportunity out there.

4 Cut your costs. This one seems like a no brainer, however, many of my clients have been slow to do the difficult cost cutting that is required to stay profitable. One of my clients was very slow to cut costs. We worked together and talked about each expense and explored other ways to get what she needed without spending so much. We found several creative ways to cut costs without hurting productivity or customer service.

5 Reduce or restructure debt payments. The payments you make on business debts, because it is money out of your bank account, are an important area that affects your cash flow. One client talked to their banker, but the banker was reluctant to refinance or restructure the debt. I told this client that the secret was to talk to a bank different from his own. Banks other than yours view gaining your deposit and loans accounts as a big win. Your current bank doesn’t always appreciate your accounts until they are about to lose them. Needless to say, this client did well in lowering their debt payments and received some other nice perks as well.

6 Reduce or eliminate capital expenditures. One business I worked with had a very tight cash flow because she is growing. Growth always creates a drain on cash. She needed equipment and trucks to get the next step. Buying new stuff was out of the question. She started asking people she knew for what she wanted and got the equipment and trucks for almost nothing.

7 Increase the productivity of your staff. I worked with a small business with a tight cash flow that was doing about $800,000 in annual sales but there was very little profit they were just breaking even. We determined through a break even analysis that if we increased sales to $1,000,000 they should add about $100,000 to the bottom line. When they came back the next year they had actually increased their sales to $1,400,000, but there was still no profit. Based on the numbers, our analysis of the situation was that they hadn’t increased the productivity of their staff. When they added new business, their staff costs expanded with their sales. The idea is to find ways for your staff to get more done with less time, energy, effort, or cost.

8 Increase your prices. Increasing price is one of the hardest things for business owners to do. I worked with one owner to research the prices of her competitors. We found that her prices were at least 25% below what her competitors were charging for the same type of products. We experimented with pricing and found that some items actually sold faster when they were priced higher. One business owner increased his prices by just $1. It added an extra $3,000 a month or $36,000 annually to the cash flow. You know that “cash is king.” It is the key to surviving the down times. By working smarter as well has harder you will improve your chances of survival and increase the value of your business. Think of it this way; by improving your cash flow now in this economy, when it bounces back (and it will), you will benefit from improved profitability, productivity, and a positive cash flow.

This article was written by Kirk Davis, an SBDC Certified Business Advisor for the Kent Small Business Development Center, To locate your local SBDC advisor please visit the SBDC web site  www.wsbdc.org/map

Join the Online Revolution -- Engage in Radical Self-Promotion

The Goal of Social Media is to Increase Sales. Really?

Social media provides the tools that enable us to have online conversations. I know, the big advice out there today about social media is don’t try to sell anything to anyone. The idea of social media is to be part of the conversation to build relationships over time. Of course, our goal in business is to sell more stuff to more people.

The new revolution in business is social media marketing. If done right, it can be your key to radically improving sales. The question is how do you increase sales by using social media? Sun Tzu in the Art of War explains that strategy is determined by the terrain. Here is an overview of the social media terrain.

Your Word-of-Mouth Marketing Just Got a Megaphone

There are three ways your customers eventually find you online:

1 Search engines

2 Browsing

3 Recommendation

Susan Boyle, chances are you have heard of her, the Britain’s Got Talent superstar already has just under 40,000,000 views on one YouTube video in just 11 days. She is listed on the second page of most viewed videos of all time for YouTube. Most of us heard about her because her performance was recommended to us. The idea is you want your business, your products and your services to be recommended as well.

Social media gives your word-of-mouth marketing a megaphone. You have a good business, your customers love you. You just need more customers. Here is an important rule of social media marketing . . .

You Must Be Present to Win

Out of sight is out of mind. There is a saying in business, “You must win mind share before you can win market share.” Social media is where conversations and recommendations are happening. By joining the conversation you become visible and good things can happen from there.

Here are some ways to be present to win:

1 Listening to the conversations you are interested in

2 Participating in those conversations

3 Publishing information

4 Facilitating a conversation

Listening

Ask your customers which social media they use. Twitter, Facebook, forums, YouTube, Yelp, others? You can also search topics that relate to your business to find where relevant conversations are occurring online. You can use Google alerts and www.search.twitter.com to  find articles, blogs, newsletters, and other online content that will help you gain insights into your customers, your industry, and discover a whole new world of ideas.

Participating

By participating on social media websites like Biznik.com, Linkedin.com, Twitter.com and hundreds more just like them you can create a profile that will show up on the front page of search engines. (I was surprised today to find I was on the front page of Google when I searched my name.) Participating in social media increases the likelihood that you will show up on the front page of search engines when customers are looking for you.

Here are some interesting ways to participate. You can start a blog, comment on other people’s blogs, comment on relevant news articles, comment on published online articles, and link to interesting information on your website and other people’s websites on Twitter.

Publishing

You can publish (for free) pictures, videos, articles and announcements. Your new customers will find your published materials and those materials will link back to your website. There are hundreds of places to publish your information.

Facilitating

Websites like Biznik.com, Linkedin.com, Facebook, Ning.com, and others like them allow you to create social networking groups for free, for your customers. You can facilitate your own conversations that will meet the specific needs of your existing and new customers.

Social Media is More like Customer Service than Sales and Marketing

There is a buying process customers go through when they are deciding to do business with you:

1 Awareness

2 Consideration

3 Purchase

4 Loyalty

Social media helps with the awareness, consideration, and loyalty aspects of the buying process. Think of social media marketing as a customer service outreach. Chances are, you are already good at customer service and social media gives you exposure to new people very quickly.

“Give Them Something to Talk About”

You know what I mean. Believe me; we are all learning how to use and how to win customers with social media. I’ve talked to several social media experts and they admit they are stilling learning and discovering. No one has all of the answers. So don’t feel bad as you feel your way through this new terrain. The best advice I have heard about social media marketing is to spend no more than one hour per day working on it. You are already busy enough. What you put online stays online and works for you 24/7. So giving it an hour a day allows you to build slowly and get better as you go.

You may not get results over night; however momentum will build as you give them something to talk about.

Radical Self-Promotion - Crawl, Walk, Run

People do business with people they know, trust, and like. Social media gets you out there. You are the face of the company. As you participate and publish you build credibility and trust. That’s why we call it “radical self-promotion.” We want to get know you. Start small. Crawl, then walk, and then run. Do one social networking site at time and then add more as you go. The good news is, you become visible, your search engine ranking improves, you encourage raving fans, you get recommendations, you get to know your customers better, you get to meet new people, and yes social media will result in more sales. I highly recommend it.

Social Media Action Plan:

1 Search online for information about your industry or line of business

2 Join and check out several online communities as you have time

3 Pick one social media website at a time and learn how to use it

4 Spend one hour a day listening, participating, publishing, and/or facilitating

5 Track website traffic, search page rank, and increased sales for effectiveness

This article was written by Kirk Davis, an SBDC Certified Business Advisor with the Kent Small Business Development Center, which is part of the 24 statewide offices of the Washington Small Business Development Center network(WSBDC).

Revisiting Your Credit Strategy

Monitoring and understanding your cash flow is probably one of the most critical aspects of business management. Cash flow has always been important to businesses, but many business owners have recently been reminded of this in a very unpleasant fashion; i.e. the cancellation or reduction of a vital credit line.

Business owners typically concentrate their efforts on year-end tax planning and strategizing for increased sales in the coming year. It is rare, in the planning process, to see businesses pay equal attention to planning for cash flow by reviewing the business’ credit strategy (the way that bills are paid and the way in which you receive payments for goods and services that are sold).

Following are some tips on things to consider when you review your credit strategy:

• Think twice about paying early on your business debts since you may use up cash reserves that may be critical for survival.

• You may need to consider asking your customers for more financial information to determine whether they have the capacity to pay for goods and services purchased on account.

• You may need to reconsider the length of time that you are allowing your customers to pay on their accounts or you may need to consider asking for a larger deposit or a greater percentage of the total cost of a project to reduce the risk of bad debts.

• Consider taking credit cards, if you are not doing so already, since the bank’s merchant fees may be a small price to pay for not worrying about collecting from some of your customers. It may be more important for you to have the cash in the bank!

• Use the maximum time allowable to pay your suppliers on account unless you will lose the benefit of a discount.

• The economy is still tight and funding is tough to find, so do not assume that your existing strategy will continue to work for you. Instead, be proactive about addressing any policies that might increase your risk for bad debts.

• Clean up your financial statements, strengthen your equity position in your business, and continually monitor your cash flow position.

Article written by Susan Hoosier, Certified Business Advisor and Certified Economic Development Professional, with the Small Business Development Center, which is part of the 24 statewide offices of the Washington Small Business Development Center network (WSBDC).

The ABCs of Profitability

As a business owner or future entrepreneur, I believe it’s never too early to start thinking about how to make and keep your business profitable. In simple terms, profitability is the amount of sales revenue left over after business costs. Learning to measure profits helps to answer the question, “Are we making enough or going to make enough money for our efforts?”

You, as a business owner, have control over four major areas that affect profitability:

1 Price you charge for your products and/or services.

2 Quantity (or volume) of products and/or services you sell (marketing or operations issue).

3 Variable costs you directly acquire by producing or buying the products and services you sell (These are called variable costs because they increase or decrease as your sales increase or decrease).

4 Fixed costs you incur whether you make any sales or not.

The strategy you come up with involves taking action to increase or decrease any of the four factors in consideration of its impact on, or the impact from, each of the other factors.

Here is an example of learning to measure profitability and make changes. A few years ago I met with owners of a service business that had not been profitable since it started two years prior. I prepared a break-even summary for them, which is a simple equation that says how many sales dollars or units sold are necessary to cover fixed and variable costs.

The conclusion was they needed eight sales a day to break even. Their gasp of horror was the only thing I heard. “But we can only process three sales a day,” they said. “Ah ha,” I responded. “There are two things you need to do to improve profitability in your business.”

1 Streamline your system, (operations), so you can handle more quantity of sales.

2 Raise prices. In this case the paperwork around each sale is what was providing their value to the customers.

The reason it took them a few years to recognize they weren’t profitable was because they were not keeping on top of their bookkeeping. Bookkeeping errors is my fifth addition to the four factors of profitability. SBDC advisors around the state will agree that nearly all of the businesses they advise have errors in their books.

One of the best things a business owner can do is to learn what each report means, how to read it and how to set it up to accurately reflect the true activities of the business. Questions I often hear are: “What is the difference between a balance sheet and income statement? Why does the business show a profit on the income statement yet has no cash in the bank?”

As the leader of the business, learning the answers can be one of the most empowering things an entrepreneur can do. When set up correctly, the information in these financial reports can be used to make accurate decisions toward being and staying a profitable business. As the saying goes, “All roads lead to the numbers.”

This article was written by Jennifer Shelton with the Bellingham Small Business Development Center, which is part of the 24 statewide offices of the Washington Small Business Development Center (WSBDC).  Initially seen in The Bellingham Business Journal and at http://bbjtoday.com/

The WSBDC offers in-depth, confidential, and no-cost management advice to businesses within Washington State.

Five Keys to Building a Strong Business

One thing all business owners have in common  is their desire to build a strong business. A strong business is one that can withstand the ups an downs of an economic cycle; it can replenish itself through profits; it’s agile, flexible, and communicates well; and it can support the owner’s lifestyle. A strong business is based on a true business opportunity and a sound business model. While a business opportunity is shaped by the market environment; a business model is the shaped by the owner.

There are at least five keys to building a strong business: the owner’s ability to lead and manage; a focus on customer needs and wants; systematized processes and procedures; hiring and investing in the right people; and managing cash.

Lead and Manage

Whether the business consists of one person or many, a clear vision and mission is imperative. These drive goals and objectives that are timely, measurable, and accountable. Amid many distractions, it keeps the owner focused. If the owner can effectively engage employees to embrace the vision and achieve company goals, the probability of success is high. In fact, the most important things an owner can do is stay focused on what the company does well and help employees do their best work. These concepts are driven home in books like “Good to Great” by Jim Collins and “The E-Myth” by Michael Gerber.

Maintain a Customer-Driven Focus

A customer-driven business is one that is synchronized with what customers really want and need. Most important is what customers value. These can be many things: a fair price, convenience, fast turnaround, quality, etc. The reward for meeting their needs is predictable sales and growth. However, “customers” include more than the buying public. They include shareholders, suppliers, bankers, employees, and others who rely on an owner’s ability to keep his or her promises. A strong business balances the needs of all these “customers.”

Use Systematic Processes and Procedures

Customers don’t really care how it’s done, they just want their needs met. However, to meet the needs of everyone—especially shareholders—production and delivery of goods and services must be efficient. The process of creating value to customers is based on a total management system originally used by Toyota and described in “The Machine that Changed the World” by J. Womack, D. Jones, and D. Roos.

Use of a total management system eliminates waste, improves productivity, assures quality, and meets or exceeds the customer’s expectations. Better use of resources results in higher profitability and higher profits feed growth. An excellent example of applying total management systems to small business is described in “Better Thinking, Better Results: Using the Power of Lean as a Total Business Solution” by Bob Emiliani.

Hire Right

An owner soon realizes that building a strong business is tough to do alone. At a minimum, an external team including a banker, insurance agent, certified public accountant, and attorney is required. At some point, though, employees will be needed to manage day-to-day functions as the business grows. An owner needs to assemble and lead people to apply principles and practices systematically and coherently. The key to assembling the right people is hiring right. This means selecting people for their talents and building on their

strengths. The next steps include investing in their talents, listening to their thoughts, assisting them in their jobs, and rewarding them for work well done. In the book, “First, Break All the Rules”, authors Marcus Buckingham and Curt Coffman share the results of in-depth interviews revealing how the world’s greatest managers use these techniques.

Manage Cash

Every strong business depends on a predictable, consistent cash flow. A profit plan measures true profitability and is the best measure of efficiency. However, a cash budget that predicts and monitors cash flowing into and out of a business is a good measure of sustainability. If an owner can predict and budget cash flow, then he or she can make better decisions on how and when to use cash. When businesses extend credit to buyers, incoming cash lags behind sales. When sales are made, assets (like inventory or labor) are required to complete the transaction and these assets require cash. Therefore, a lot of cash is going out and not a lot of cash is coming in throughout seasonal or cyclical fluctuations. Since the business owner can’t pay bills with negative cash, he or she has to either borrow cash or inject it. Managing cash with a budget helps the owner predict cash shortages so funds can be arranged (often with a bank loan) to fill the gaps. When collections create excess cash, the short term loans can be paid back. Even profitable businesses can go

bankrupt if they haven’t balanced the cash flow cycle.

While many factors contribute to building a strong business, these five deserve special attention. Strong businesses support their local communities and are the foundation upon which the economy grows.

This article was written by Janet A. Harte, an SBDC Certified Business Advisor with the Vancouver Small Business Development Center which is part of the 24 statewide offices of the Washington Small Business Development Center (WSBDC).

The WSBDC offers in-depth, confidential, and no-cost management advice to businesses within Washington State.