April 2013

Starting a business is one of the most exciting things you will do in your life.

If you think back to when you first started, your mind was full of opportunities and possibilities.

You had a clear and compelling purpose.

Little else mattered.

That purpose (perhaps even a calling) inspired you to work crazy hours, up to seven days each week.

And when you weren’t working in your business, you were thinking about it.

Do you remember how good that felt?

But Now…

If you’ve lost your mojo for your business, then it’s a drag.

It’s no longer an exciting dream but a frustrating nightmare.

You thought you’d have a business you love.

Instead, you’ve finished up with a business you hate.

Or perhaps it’s worse than that.

You’re indifferent.

The passion has gone.

The Three Big Reasons Why You Have Lost Your Mojo

1. You’re ill.
2. You have serious family problems.
3. In the struggles and frustrations to make your business successful, you’ve lost your big purpose.

Let’s take a look at these reasons for losing your mojo in more detail.

Your Health Threatens Your Business

I’ve certainly been there.

I came back from holiday in May 2010 and told my mastermind partners that I’d lost my mojo for my business while I was away. The effort of having a good (but relaxing) time had totally drained me.

I remember vividly saying “I’ve lost my mojo” when a few weeks before I had been so positive after recovering from a previous health problem.

A couple of months later I was sitting in front of a respiratory consultant with an appointment arranged a week after a chest X-Ray. My file was marked on the front in big letters written with a black marker pen “VERY, VERY URGENT.”

That focused the mind I can tell you. As did the consultant forcing me onto his list for bronchoscopy procedures the next day, despite the department telling his secretary that the list was full. It wasn’t the suspected advanced lung cancer than goodness but it was the start of my vasculitis.

Several months later I was sitting in front of the consultant again, and he said that it looked as if the disease had started to attack my kidneys. Two days later I was in intensive care with acute kidney failure.

The disease, which would have killed me in a few months is now in remission. The symptoms are largely under control although I have to live with the effects every day.

Something like this can suddenly strike any business owner. Hopefully not you but it is best to look after your health and to be prepared.

1. Look after yourself. Keep yourself fit and eat well. Try to cut back if you smoke or drink because the stresses of owning a struggling business can make you turn to this false comforts.
2. React to any symptoms and see the Doctor. Don’t soldier on and be brave.
3. Build a business that can survive and prosper without you if possible. Employ good people and build robust systems that maintain quality when you’re not there. These nice-to-haves suddenly become must-haves, but they need to be in place while you are fit and healthy.

If you have a health problem, struggling with a business on the edge could push both the business and you into much more serious difficulties.

You Have Serious Family Problems

Sometimes you have to accept the work is a secondary priority. Some things really are more important.

Again I’ve been there.

In recent years, my partner (I wish I could think of a better phrase for ‘er indoors) has hopefully recovered from cancer and my father has died from it. Both times, my business had to take a back set.

I believe you work to live and not live to work.

When I’ve talked to insolvency practitioners, they often find that relationship difficulties and other family problems lie behind some business failures they see.

You need to create a robust business in the good times, so that, if your personal life ever hits the rocks, your business doesn’t.

You also need to invest in your relationships while you can. Remember the saying “All work and no play makes Jack a dull boy.”

I bet one of the reasons you started your own business was to take better care of your family and to give them things that you couldn’t as an employee of another business. It doesn’t make sense if you don’t have quality time with the people who matter most to you.

You Have Lost Your Purpose

This is the most common reason why a business owner loses his or her mojo for the business.

The struggles of surviving drive out of your mind the reasons why you started a business in the first place.

If you think back, you were energised by one or both of:

• How your business can help customers with their problems. You had a cause that you felt passionate about.
• How you can provide a much better life for the people you love by owning your own successful business and truly living the dream of being your own boss.

Probably the best idea from the famous book, The E Myth Revisited is the principle that your business needs to be designed to give you the life you want.

In the book, Michael Gerber explains the idea of your Primary Aim. This is the powerful and visionary statement that describes what your life is all about including how you want to be remembered with your legacy.

Your Strategic Objective defines the deal you have with your business. It explains why your business is an opportunity worth pursuing and committing your time to build.

I’m very clear that the purpose of a business is to create value for customers and the business owner(s). If you lose sight of that, you will run into problems.

Lock yourself away for an hour on your own with a pen and a blank sheet of paper or two.

I want you to find your motivation for your business again.

I want you to get clear on:

1. What problems and pain are you working to move your customers away from?
2. What solutions, pleasure and gain are you working to move your customers towards?
3. What problems and pain are you working to move your family away from?
4. What solutions, pleasure and gain are you working to move your family towards?

A successful business means that you do great things for both your customers and for your family (and yourself).

Get emotional.

Get committed.

Find your business mojo.

21 Reasons Why Your Business Isn’t As Successful As You Want It To Be

This is the first of a series of articles I’m writing to look at the major causes for poor profitability in an indecently owned business.

21 Reasons Why Your Business Isn’t As Successful As You Want It To Be

A harsh truth that you need to accept is that people who buy what you sell (your customers and clients) are generally selfish and don’t care much about you.

When they think about buying, one main thing is going through their minds.

What’s In It For Me?

In marketing, this is often abbreviated to WIIFM and people will joke about buyers listening to their favourite radio station WII-FM.

They will rarely come out and ask the question directly but it is going through their minds.

Why Are They So Selfish?

They don’t mean to be nasty or unpleasant but buying involves making a sacrifice of something valuable to them.

To buy, they have to sacrifice money and want to be confident that they’ll get something back that’s worth even more.

Some people care about money in itself.

Most see it in terms of other options.

If I buy this smartphone, I can’t buy that laptop.

If I buy this holiday, I can’t go on that holiday.

If I buy this new car, I will put a major dent in my savings and I won’t have as much security in the future.

This makes purchasing decisions complicated, and sometimes, it’s much easier not to make a decision – to leave the bank in the bank – than to buy something and regret it later.

How Do You Answer The WIIFM Question?

OK let’s look at the issue both in the specific and the general.

If you’re talking to the potential buyer in person, you can investigate the problem and its implications and you can find out about the solution the buyer wants and the criteria they might have set to find the right solution.

If you’re wondering how to do this, read

SPIN Selling Questions – Effective Sales Questions

Then when you present your solution, you need to be addressing its features, advantages and benefits.

Strictly speaking, the “What’s in it for me” question is answered by the benefits.

However, without back up, they can sound too good to buy true.

Buy this product and you’ll be:

• Irresistibly attractive to the person you want.
• Amazingly rich and powerful
• Slim and shapely with the body you’ve always wanted.

Can you see how benefits can sound superficial and even hyped.

It’s enough to put off rather than entice a wary potential buyer who is only too well aware of the sacrifice that has to be made in buying from you.

That’s why I believe you need to be backing it up with features and advantages.

You will hear the phrase

“Features tell, benefits sell.”

That’s true to an extent.

Many features are technical, and we don’t automatically understand the importance of having the new and updated ZB76a widget and why we’d be wasting our money if we bought the old, obsolete product with the ZB75 widget.

These features need to be translated but as we are educated, we begin to understand.

The promised benefits become much more credible and remember, to buy, we need to be confident.

For more information about features, advantages and benefits, please read

Features Advantages Benefits Make Your Selling FAB

Answering WIIFM In Marketing

It’s harder to do all the work in your marketing unless you resort to a 20 page sales letter that lets you spell out your entire sales story.

You have three main options:

1. Hit the most common emotional hot buttons. Cherry pick the benefits and associated features and advantages.
2. Use your marketing to drive people into a sales consultation where you can move to discuss their specific issues and pay-offs.
3. Educate and pre-sell over an extended period. The product launch formula introduced the idea of a sideways sales letter where the sales message is consumed in bite-sized pieces.

What is best? That depends on your particular situation including the nature of the product or service you sell and how open to influence your buyers are. Some products are much easier to sell than others as your own buying experiences will show you.

21 Reasons Why Your Business Isn’t As Successful
As You Want…
And What You Can Do About It

If you are frustrated and disappointed with the way your business is performing, let me reassure you that you’re not on your own.

But where you’ve taken a big positive first step is that you’ve decided to investigate the underlying causes why your business isn’t generating large profits and generous cash flows consistently each month.

That puts you well ahead of the game compared to the thousands, perhaps millions of business owners who accept their lot and suffer in silence with a business that under-performs.

My Role In Helping You To Find The Causes For Why Your Business Is Struggling

I want to help you to diagnose the problems that are holding your business back and to guide you to the right solutions.

I’m going to have to be blunt.

If I sugar-coat my words, they may pass over you and that means this opportunity will be missed.

The Three Big Causes For A Business To Struggle

1. The business owner(s) and managers
2. The business
3. The market

The problem may lie principally in one of those areas or it may ripple through all three.

For You To Make Changes That Improve Your Business You Need To Have (Some) Control

There are two types of people.

1. Those who accept primary responsibility for what happens to them and know that they can make changes to improve their situation.
2. Those who refuse to accept primary responsibility for what is happening around them and blame other people or the general environment.

The economy sucks. You can let it drag you down or you can do something about it.

Fortunately the big difference between business owners / entrepreneurs and the rest of the working population, is that many employees are stuck with a victim-mentality and have things happen to them with little control.

Business owners generally believe they can make things happen.

They often have a positive mindset that, even in adversity, there is an opportunity to be found and exploited.

I hope you have a positive mindset too.

If not, you might want to stop reading because this is going to be a tough ride.

However if you’re an action taker determined to be in control of your own destiny, I believe you’re going to get great insight from what follows.

Why I Start With You

This may feel like a personal attack but it’s much too easy to blame the wretched economy and to use it as an excuse for poor performance.

Bear with me, I mean well.

The reason I want to get you to face some hard facts about yourself and how you are working is that these issues are the easiest to correct.

If the problem lies inside you, you can fix it and provided you keep disciplined, your business improves.

If the problem lies within your business, the span of what you have to control increases (the strategy, the systems and processes, the products and services, the people) and the level of control reduces.

It’s your business. You can make things happen but it’s harder to change than it is to change you.

If the problem lies within the market, there are more players to influence (customers, direct and indirect competitors) and you have less control. In terms of overall market demand, you may have negligible influence so you have to try to increase your market share without causing too many problems with competitors.

Section 1 – How Are You Holding Back Your Business And Causing It To Struggle?

It’s unlikely that all of these issues will apply to you but some might.

Read the question out loud.

Try to answer each one honestly, as if you’re talking to your husband or wife, your best friend or to a therapist or counsellor.

It’s a good idea to get a piece of paper and write the numbers 1 to 21 down along the side. Then make your own assessment – perhaps graded into:

1 – often a big problem

2 – sometimes a problem

3 – not usually a problem

4 – never a problem

1 – Have You Lost Your Mojo For Your Business?

Have you stopped being excited when you wake up in the morning and think about your work?

>>>> What If I’ve Lost My Mojo For My Business?

2 – Have You Stopped Working And THINKING Hard Enough?

This is a contentious point because I know many business owners work extremely long hours. However there is much more to working hard than time spent “doing stuff”. Have you heard of the 80/20 Rule? How well are you focused on the 20% of activities that generate 80% of your results?

Success comes down to a few things

• How you feel.
• How you think, what you think and how well you think.
• The decisions you make and how you plan to turn those decisions into effective action.
• What you do and how well you do those activities.
• The results you achieve.

These have feedback loops between them. How you feel depends on what you think, do and achieve but also impacts on what you think, do and achieve.

3 – Are You Unclear On Your Goals And Priorities?

Having a clear purpose for your business is great news but it’s extremely hard to move from such a big vision down to the activities you do on an hour-by-hour basis without setting goals and objectives, deciding priorities and, yes, having a plan.

4 – Are You Poor At Controlling How You Use Your Time?

Are you clear that you make the highest and best use of your time while you are working? Or do you find that you waste too much of it and, when you look back at the end of the day, you find yourself wondering what you did and what you achieved?

5 – Are You Bad At Working To Your Strengths And Delegating Activities Linked To Your Weaknesses

As humans, none of us are perfect. We have strengths and weaknesses and we should recognise and accept them.

Much more gets achieved when people do what they’re good at and enjoy doing. Too many business owners spend too long doing low value activities that no one in their right minds would pay them to do.

6 – Do You Feel Lonely And Isolated With No One To Bounce Ideas Off?

Being the owner and main decision maker in a business can e a very lonely place and especially if the business is struggling and tough decisions need to be made.

7 – Do You Start Many More Projects Than You Finish?

Many business owners and entrepreneurs are creative ideas people. They jump from one great idea to another but move on before finishing the last. Unfortunately this is a great way to spend a lot of time, energy and money while achieving very little.

8 – Have You Become Complacent About Why Your Business Has Been A Success In The Past And In Denial Of The Current Situation?

It has been recognised that instead of success breeding more success, it can often lead to decline and failure. That’s because people are reluctant to make changes to something that has worked and although the market is sending signals, they are excused as blips.

Complacency about the future prospects of the business can easily lead to denial as problems increase and profitabilty gradually reduces, even to the stage where the business is incurring losses.

Section 2 – The Core Business Issues That Are Causing Difficulties

I’ve got no intention of letting you off the hook now that we’ve moved from you to your business.

As the business owner, you are responsible for everything that happens in your business.

If your sales revenue is too low, it is your fault.

If there isn’t enough money in the bank to meet the next payroll, it is your fault.

If your employees are driving you crazy, it is your fault.

Remember that accepting responsibility is empowering because it means that you can make changes to create improvements. In fact, it is your responsibility to create a successful business that gives certainty and stability to your family, your customers, your employees and everyone else connected with your business.

9 – Are Your Products And Services Seen As A Commodity By Customers Because Your Business Is Not Differentiated?

This reason for poor performance is my particular hobby horse and is of vital importance.

If your business isn’t different from the competition, then unless your operate in a market where demand far exceeds supply, your business has little reason for its existence.

Harsh I know but if you can’t bring some kind of unique value and satisfaction to customers, why should they give you any kind of attention, let alone buy from you?

10 – Does Your Business Lack Competitive, Value For Money Offers?

This is a reminder that while people may love (or hate) businesses, they buy particular product or service offerings.

I’d love an Aston Martin car, they don’t make one that’s right for me and certainly not at a price that I’d be willing to pay.

11 – Do You Struggle To Attract Enough Enquiries From Prospective Customers?

As I make clear in the Six Steps Profit Formula report, even when you have a great offer, it needs to be wrapped up in a compelling promise and you need to get it in front of the eyes and ears of your target market.

12 – Do You Find It Hard To Convert Enough Enquiries Into Paying Customers?

You don’t get paid on leads. In fact it is often an expensive process to convert leads into customers and considerable money can be wasted if too large a proportion of sales opportunities are lost.

13 – Are Many Customers Disappointed With Your Product or Service After Buying And Don’t Keep Buying?

It’s one thing to create a customer. It’s another to keep one and turn it into a long term profitable relationship.

14 – Do You Lack Follow-Up Products And Services To Sell After The Customer Buys The First Time?

Even if you provide a great service and receive plaudits for your customer satisfaction, your business may not be able to profit from the goodwill created if you can’t offer extra products and services.

15 – Are Your Operating Costs Too High For The Prices You Have To Sell At?

The market and your ability to influenced perceived value will determine the upper limit of the prices you sell at but your profitability depends on your costs to buy, create and deliver the products and the costs to service the customer.

A great business can be ruined by poor cost control, inefficiencies and low productivity.

16 – Do You Have Poor Quality, Untrained And/Or Unmotivated Staff?

If your employees aren’t up to it, your business will never take proper advantage of the opportunity for profit available from the market. There may be recruitment, management or leadership issues that need to be tackled urgently.

17 – Does Your Business Not Work Very Well When You Are Not There?

Having good people is a great start but they won’t produce great performance if the systems and processes are not properly designed and fit for purpose.

Great systems mean that your business delivers consistently high quality whether you are there to oversee operations or away.

Section 3 – Business Difficulties Are Coming From Outside Of The Business

If you’ve gone through the first two sections about your performance as the business owner and driver force or your business and about the business itself, but haven’t found much to fix, then the problem lies within the market.

18 – Is The Market In Long Term, Permanent Decline?

In this situation, you face a big strategic issue. Do you leave this market and look for other opportunities or do you aim to dominate the market that’s left?

19 – Is The Market In A Cyclical Decline That Should Bounce Back In The Long Term?

In this situation the business is dragged down by the market, but provided the business can hang on, demand will recover and better profitability will return. This is about managing the short term future while maintaining long term prospects.

20 – Is Your Market  Extremely Competitive Where Prices Have Been Driven Down So Low, Profits Have Been Competed Away?

Some product markets suffer from crazy, suicidal competition with average selling prices forced down close to marginal cost levels. It’s easy to get into a price war that destroys the long term profit potential and permanently shifts the balance of power towards customers and away from suppliers.

21 – Is The Market Changing Quickly Or Facing A Potential Major Shift In The Way It Works?

Some markets go through a major change where the old rules of competition and their key success factors are overturned with a new way of working. The internet first changed the distribution channel for books, CDs and DVDs and is now making the physical products obsolete.

Has that happened to you or do you fear that it might happen?

How Did You Do?

There are twenty one major reasons why your business may not be as successful as you want it to be.

How many of the questions triggered alarms with you?

If you graded your answers on a sheet of paper, how did you score?

I’m not going to give you an overall rating. That’s not how this is intended to work.

Instead it’s meant to highlight the areas where you need to prioritise your attention.

What You Can Do About These Issues

I will be writing detailed articles about each of these issues to give your more guidance, outline options and share some practical tips.

If you feel you scored badly, I urge you to seek professional advice.

If you fear your business is already insolvent, you must take specialist advice quickly because the consequences are very serious if you continue to trade. In the UK for example, the protection of limited liability given by a limited company can be lifted and those responsible can be made personally liable for the debts.

If your business is struggling but without imminent risk of bankruptcy, it would be a good idea to:

• Talk to existing advisors like your accountants. It might be time to make sure you are clear on the current financial position of the business and put together profit and cash flow forecasts to look into the future.
• Talk to people who can help you to solve the problems at source. I obviously believe you should talk to a business coach but you might be confident in your diagnosis of the problems and want to find more specialised help.

Please don’t ignore the situation.

Only one of the issues above – the cyclical decline – is going to get better on its own and even then, it may take a very long time and your business may not be in a position to take advantage of any upturn.

Look out for the articles to appear on the detailed points. I will be putting links under the relevant questions to make it easy to find what you need to know.

Here is a video by marketing academic Philip Kotler talking about the recent developments to marketing.

There are significant differences between the academic view of big company marketing and practical marketing for small businesses but it’s good to get back into theory from time to time.

When Jeff Walker created and popularised the Product Launch Formula, he turned Internet marketing on its head.

Here is a video of Joe Polish interviewing Jeff. It’s over 80 minutes long.

It’s easy to get a bit too cynical about the product launch process if you’ve experienced it plenty of times in the Internet marketing “make money online” niche.

It can get very hyped up when there are hundreds or perhaps even thousands of affiliates promoting the product launch and everyone’s email inbox is being saturated with news of the launch.

The process of building up expectation and excitement before the product is released and then removed from the market isn’t too much different from the way films are promoted.

First there is the cinema launch, then its released on DVD and then makes its way to paid for cable and then free TV. Each time squeezing more money out of the market.

Even as company as wholesome as Disney release a DVD to a great fanfare and then withdraw it from the market, ready to go through a big launch again sometime in the future.

Jeff talks about the effect of the launch as the equivalent of a sideways sales letter. Instead of receiving the entire sales pitch in one go, you get it sliced into more palatable segments.

You also share valuable content to give people a chance to buy into the ideas. Perhaps to even get results in advance.

This is a great example of pre-selling a product or service and building up desire before it can be purchased.

The Product Launch Formula gains a lot from the ideas of influence and persuasion developed and popularised by Robert Cialdini.

Does anybody care about your social media marketing tweets?

Why don’t you get more reaction?

How I Feel About Twitter As A User

I must admit that I definitely blow hot and cold on my views about Twitter.

me on twitter

I’ve never taken the view that I’m going to automatically follow the people who follow me.

In fact I see the two groups as enetirely different which is why my twitter statistics are very lopsided (as at 20 April 2013).

I think I’ve been around a 1,000 followers for years.

People follow me, hoping that I’ll follow them. I don’t so they unfollow me.

That seems a strange way to work to me.

I don’t expect the people I follow to be automatically interested in me, especially if we don’t have any kind of relationship.

Why should people expect me to follow them?

Instead of an engagement tool, as social media was originally intended, it has become a numbers game.

People blast out information to people they don’t know but would like to influence.

But how can anyone following 10,000 people pay any attention to the tweets they receive?

It’s not possible to be interested in that many people.

It’s certainly not possible to be interested all the time.

It occurs to me that there is an awful lot of noise on Twitter and very little is relevant most of the time.

It doesn’t deserve attention.

So we’ve all learnt to ignore most of what we see.

Just like we ignore most of the advertising we see.

I go through phases where I will log into to my Tweetdeck account for Twitter on my smartphone and read what people are writing several times a day.

Things that I see and I think people who follow me (small business owners mostly) will be interested in and are good, I will retweet.

But I’ve stopped retweeting stuff that goes to a website that isn’t mobile friendly.

And I rarely tweet stuff if people don’t occasionally reciprocate or thank me.

I’ve given up on Facebook (although I think my tweets are linked). The website irritates me for some reason.

I haven’t got my head around Google Plus.

LinkedIn irritates me.

Perhaps I’m not very social but it seems to me that there are only two groups who really like social media:

• people who are friends and genuinely interested in each other
• social media experts who are hyping up the opportunity and are particularly active and keenly followed by other people who are believers in social media.

What do you think?

Do your social media habits as a recipient match up to what you want as a broadcaster?

Or are you as guilty as the rest of us for creating more noise than value in social media channels?

If You Want To Get Better Use Out Of Twitter

This article looks useful as it has 9 lessons for better tweeting.

Who Gives A Tweet

When you think about why people buy what they buy, you will find that the decision process operates at two very distinct levels.

Why People Buy Is Really Two Questions

1. Why do people buy the generic solution?
2. Why do people buy a specific product or service?

An Example – Why Do You Buy And Own A Car?

The reason probably goes something like this…

You have a need or want for personal transportation that gives you independence from public transport and from other people.

First look at a need for a car.

Perhaps you live in the countryside and you work in the city. There is no public transport that will get you to and from work in a reasonable time.

You don’t know anyone else who lives nearby who makes a similar journey at a similar time so there is no opportunity for you to receive a regular lift.

You could use a taxi service every day but buying and owning a car is cheaper.

Your need for a car might not be that strong and compelling.

Perhaps it’s your want for a car that makes you choose to spend some of your spare money on a car rather than saving it or other forms of expense.

Perhaps you value the freedom and independence that having your own car gives you. While you can accept that other people may decide to spend their money in a different way, owning a car is important to you.

Why buy a new BMW 520 rather than a second hand Mercedes C class?

Once you’ve decided that you will buy a car, why do you buy a particular car?

The issues come down to your purchase criteria for what you want your car to do for you, and in this case, say about you.

There are some functional issues:

• How many people do you want or need to carry?
• Do you need a car to be a certain size so that you can fit in it? I do.
• How many doors do you want?
• How big a boot do you need?
• How important is the fuel consumption and the other running costs per mile?
• Will something stop you from having the car you want? For example sky-high insurance premiums?

These narrow you down to a broad category of car that you want.

Then you have to balance how much you can afford to spend on a car (to buy it or lease it per month) with how you feel about a new car rather than a second hand car.

Then you need to focus on particular brands and models. Is one appealing to you particularly because of its looks, its image or performance?

Can you see how a decision like buying a car is made up of many smaller decisions which gradually narrow down the choice until there are a small number left.

Using These Ideas

There are fundamental questions you need to answer:

Why do your customers buy what you sell at the generic level?

Why do they buy from you rather than your competitors?

Why do they buy that particular product or service from you, rather than something else you sell?

And, just as important…

Why don’t well qualified prospective customers buy from you and either:

• Buy from one of your competitors?
• Don’t buy at all?

Answering these questions will go a long way to showing how you need to improve your lead generation and conversion activities.

It’s ironic that after years of a struggling economy and firms doing whatever they can to survive, a big threat lies in the signs of recovery.

That’s because growth can cause financial problems.

It’s another reminder of the adage:

Turnover is vanity, profit is sanity but cash is reality.

As A Business Shrinks, Working Capital Was Released Back Into Cash

When businesses traded as the economy went into recession, profit reduced and some may have even slipped into the red before overheads could be trimmed back.

However, it’s likely that they received a cash boost which more than compensated for the loss at the bottom of the Profit and Loss Account.

Working capital is normally defined as:

• Stock and work in progress (or inventories); plus
• Debtors (accounts receivable) and payments in advance; minus
• Creditors (accounts payable) and other obligations to pay in the future

The way money flows across these elements in the balance sheet is known as the working capital cycle. Money invested in working capital increases as the business grows and reduces as sales revenue declines.

Provided stock turn (inventory turnover), debtor days (days sales outstanding) and creditor days (days purchases outstanding) remain consistent, the change in working capital is inevitable.

This may have been an unrecognised benefit of the hard times.

The problem will become very clear if the economy picks up and carries businesses with it.

If you’re a service business and you sell person hours rather than products, it’s likely you will have some kind of work in progress that can grow quickly as business grows.

This represents work down for clients but not yet invoiced. Because your main cost is labour, your potential cash problems may be even worse than for a stock business. You don’t have the benefit of delayed payment terms as your employees need to be paid each week or month.

As The Business Grows, Working Capital Increases

Depending on your terms of trade, you know that if you sell this month, you won’t get paid for two, three or four months time.

That timing difference between goods going out of your stock and money flowing into the bank causes problems.

If you think the increase in demand is going to continue and not be a one-off, you will want to replace what you’ve sold and increase your stock.

You will buy more.

This is the systemic effect of changes in demand that ripples through the supply chain and unfortunately amplifies the effect.

If you’re not familiar with this effect, please read

The Beer Game: Systems Thinking When Systems Bite Back

This can over-exaggerate the growth which causes demand to be stopped dead in its tracks as customers realise they are seriously over-stocked.

Is The Cash Problem Industry-Wide Or Company Specific?

If everyone is experiencing growth, then the problem is likely to be widespread.

The impact on individual companies depends on:

• The length of their own working capital cycle. The shorter the better.
• Their relative profitability. Profit will eventually put money into the bank so businesses with higher profit margins will have less of a problem than the lower profitability businesses.

Both factors can be measured in relation to sales revenue:

• Working capital to sales %
• Profit before tax to sales %

If growth isn’t spread throughout the industry, the individual business still risks the same growth in working capital and cash crisis. There is also the risk of price wars which carries very different risks to long term profitability.

In fast growing businesses, this shortage of working capital is known as over-trading and has caused many seemingly successful businesses to suddenly collapse into bankruptcy.

What Can Be Done To Manage The Cash Problem Of Business Growth

The first suggestion won’t surprise you.

Do a cash flow forecast and update it regularly.

Importance Of Cash & Cash Flow Forecasts

Look for ways to reduce your working capital cycle.

• Can you reduce the stock to sales revenue?

• Can you collect your debtors (accounts receivable) faster?

• Can you negotiate delayed payments to your suppliers (accounts payable)?

The first sign of an increase in demand from your customers might not seem to be the appropriate time to squeeze their credit terms. In fact, you might be tempted to do the opposite and agree to their request for extended terms.

Be careful.

Just as an upturn in business can put your cash flow under pressure, so it can with your customers.

There will be plenty of businesses who survived the recession but can’t survive the upturn when it comes.

My advice is to credit check every customer whose non-payment would cause you the slightest difficulty.

It’s not infallible but it gives you information to make decisions.

Stick to credit limits and combined with your agreed credit terms, actively manage your customers’ debts. If necessary, take action on overdue debts.

If you try to sneak extra credit from your suppliers by delaying their payments, I recommend that you monitor this creditor stretch. Your bank balance and cash flow forecast are no longer showing the underlying position.

If creditors suddenly tighten up (as they hit their own cash crisis) or even go bust and you have to find a new supplier who holds you rigidly to agreed terms, your cash management can change dramatically.

Look at your stock / inventory levels and make cautious decisions about increasing minimum and maximum stock levels. These should be based on the lead times for supply and the variability of demand.

It might be worth paying a small premium in price to buy from a company who can delivery the next day rather than in four weeks time for some proportion of your supplies.

The last issue to consider is the profitability of the growth.

Again, at the first hint of a big order after lean times, it can be very tempting to offer a big discount to make sure you get it rather than your competitors.

Talk it through with your management team. Pay particular attention to the margin you’ll be left with. Is the prize worth a few cash management problems? How will competitors and other customers react if they discover this low price offer?

Low profitability makes the cash problem from growth more likely. Reducing prices from a low profit base can be suicidal.

Remember, turnover is vanity, profit is sanity, cash is reality.

What Do You Think?

Have you experienced the financial problems that come from growth?

What happened? What did you do?

One of the most popular and most compelling sales promotion offers in retail marketing in particular is BOGOF.

This stands for Buy One, Get One Free.

Sometimes it is shortened to BOGO (buy one, get one) but I like the F. It makes it seem naughty but nice.

It’s also known as the “two-for” or two for the price of one offer.

Why BOGOF Offers Work So Well

As humans’ one of our most basic (and not very attractive) emotions is greed.

We naturally want more of a good thing.

If one bar of chocolate is good, two bars are better.

We also respond very eagerly to the word FREE.

It attracts our attention and, if we have any particular desire, it leads us into action.

For the retailer, it:

• Makes us more likely to buy. We assume we are getting a bargain. Some may see the one that is free, others may see both as the equivalent of half price.
• Makes us more likely to buy more than one pair. Remember the greed emotion where more is better. These BOGOF offers can tempt us to spend much more than we anticipated.
• Will encourage us to try new things which we might decide to buy permanently.

But the basic arithmetic for profit doesn’t look good

If the margin is 40% and the product is £1, then, the cost is 60p

Buy one, the shop makes 40p profit.

Buy two under a BOGOF offer and the shop makes a 20p loss (£1 sales revenue minus £1.20 cost of sales)

That doesn’t look good.

So what if the profit margin is 60%?

The sales price is still £1 and the cost is therefore 40p.

Buy one, the shop makes a profit of 60p.

Buy two, the shop makes a profit of 20p (£1 sales revenue minus cost of sales of 80p).

It’s profitable but the profit has dropped sharply.

How Does The Store Do It?

First the promotion is backed by the manufacturer or distributor.

The retailers costs are cut sharply.

Ideally the retailer doesn’t want the profit on the transaction to reduce.

That’s hard with a BOGOF unless there is some cheating.

Unfortunately it has become sneaky to increase the reference price of the single item for a few weeks before the promotion.

This is reference price manipulation.

If the store increases the price from £1 to £1.30, the arithmetic looks very different.

At a base cost per unit of 60p (without support from the manufacturer), the loss on the transaction of 20p turns into a profit of 10p.

At a base cost of 40p, the profit on the transaction jumps from 20p to 50p. That’s not much shy of the original 60p profit, so if the manufacturer puts 15p into the pot, the retailer is gaining.

How Can You Use BOGOF To Increase Sales?

1. Be honest, open and fair to your customers. Don’t try to trick them with false deals because it can severely damage your reputation, and they may never buy from you again.
2. Select your products carefully. High margin, popular products that people want are obvious but are there products that will encourage customers to buy other things, now or into the future?
3. Get support from your suppliers.
4. Promote it to attract new customers to your business.

The Other Use Of BOGOF Offers

Sometimes this form of sales promotion can be used to get rid of excess stocks and inventory.

If you’ve bought too much and you need to convert it into cash quickly, a BOGOF deal can motivate customers to buy.

It won’t work for all products.

Some things you don’t want two, for example, two new roofs for the price of one anybody?

Others you don’t want at an implied 50% pricing discount.

What Do You Think About BOGOFs?

Do you find these offers hard to resist?

What’s the strangest BOGOF offer you’ve seen?