# Profitability Problems

## Profit Gaps Example

We’ve gone through a lot of theory about profits and finance without having to resort to many numbers examples.

## Reversing The Death Spiral of Profits

The story of Peter the Printer (link to death spiral) is a gloomy but the Death Spiral of Profits can be reversed.

The key question is:

## The Death Spiral Of Profit

The death spiral of profits is meant to sound dramatic because its impact can be dramatic.

It’s based on the idea that lower expectations of your profit breed lower profits, so you then lower your expectations

If your business is losing money, you have a situation that can’t be sustained indefinitely. The clock is ticking and, unless changes are made, your business will fail.

## The Cash Burn

In the days of the dot.com bubble in the late 1990s, a new measure became the rage called the cash burn, measured in months.

This was the number of months the business could continue to trade as it currently was, before it ran out of cash.

This was simply the amount of funding available divided by the monthly cash outflow.

If there was £80,000 in the bank and the business was using £20,000 of it a month, the cash burn was 4 months. If nothing changed, then the following month, it would be three months as the cash would have dropped by £20,000.

This meant that an end date could be calculated. If your cash burn at the end of April was 4 months, then everything was over by the end of August unless:

a) the net cash used changed for the better;

b) more money was invested into the business to give it an extended life.

It’s simple arithmetic that halving the burn rate, from £20,000 to £10,000 per month extended the life of the business. The £80,000 = 4 months became 8 months and that gave much more time for bright ideas to be thought about, implemented and improved before the crunch.

## The Secret to Increasing Your Profits by Vincent Turner

The full title of this book by Vincent Turner is

## “The Secret to Increasing Your Profits – An Introduction to Breakeven Analysis“.

In my review at Amazon.co.uk, I rated the book at the Four Stars level. This means I consider it to be good or very good.

Here is my review.

## Short and simple explanation of break even analysis

Business owners need to have financial acumen and the two fundamentals I want them to understand are

1 Break even analysis or as it is sometimes called cost volume profit analysis.

2 The cash flow cycle in a business as a business buys stock, pays for it, makes a sale and collects the cash.

This book looks at the first issue. [continue reading…]

## 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
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.

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.

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

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

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?

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.

If there isn’t enough money in the bank to meet the next payroll, 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?

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?

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.