How to Lose Customers and Make Money

September 11, 2007 at 11:19 am | In Business | 2 Comments
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What businesses want to know is how the cash flow and profit will be impacted by changes. Changes that include the implementation of the actions to realise the “important stuff”. A tool that shows the impact of changes in cash and profitability is the financial model of the business.

A financial model is your business in numbers. The model will include the profit and loss statement, the cash flow statement and the statement of financial position (balance sheet) of your business. The difference between the statements in the model and those that are prepared by the accountants and book keepers is that they are a model of the future rather than a statement of the past. The model also includes the information behind the numbers. It identifies what are the “drivers” of the numbers in the statements. The model can start off simply and grow in complexity and sophistication as the business gets used to using it.

To start your financial model use this five step process. Microsoft Excel or a similar spreadsheet product is the ideal tool to use to build your first model.

Step 1: Identify your revenue drivers

Initially this could be your volume of sales and the average sales price. Multiplying these two statistics together will provide the total revenue number that feeds into the profit and loss statement. The model can evolve to further break down these statistics. For example rather than just having a total volume of sales each product or service that is sold can be separately modeled. It can be further developed by identifying the different type of customers (e.g. those that are offered discounts, those in different geographic regions (if they pay different prices)). Matrices of statistics could be developed that feed into the revenue line of the profit and loss statement.

Step 2: Identify your cost of sales and cost of production drivers

These are the direct costs of producing and selling your product or service. In the early stages of the model life the drivers could be production volume and average cost of production. In a service business the costs of production would largely be the salary costs of the people providing the service. If you are the owner of the business remember to include an allowance for your own costs. A suggestion for the amount to use is what you could earn working for someone else. For a business that produces a product or products the model could evolve in sophistication by identifying raw materials and the amount of the raw material that is consumed in each production process.

Step 3: Identify the drivers of the administration and support costs

Use the 80 20 rule in all steps of producing the financial model. In this step the rule dictates to spend time on identifying the drivers that result in 80% of the total costs. In fact if these costs make up less than 20% of the total costs of the business I suggest that initially these costs should not be modelled but fed directly into the profit and loss statement of the financial model.

Step 4: Model the businesses financing and investment strategy

Use your vision and other planning tools to identify the future capital expenditure requirements of the business and feed this information into the cash flow statement of the model. This will help identify the financing requirements of the business.

Step 5: Verify the model

Check the accuracy of the model by recreating last year’s results. Use last year’s data on the business drivers to test that you can recreate your actual financial statements in the model. Once this is done you can start to estimate the impact of the improvement initiatives on the business’s future cash flow and profitability.

But what do these four steps and the financial model of the business have to do with the headline of this article? Predicting the future profitability based on the best available current information is only one benefit of the model. Going through the process of developing the model will help identify the different margins or profits that each class of customer provides. One of the decisions that you may make as a result of this analysis is to stop servicing a class of customers that provide a low margin and spend your time increasing your market share of the customer class that provides a high margin. Thus by losing customers you can make more money.

What are you committed to

September 11, 2007 at 10:43 am | In Life | Leave a Comment
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Let’s start with the concept that each and every moment of our life we are committed to something. Even when we are lying by the pool on vacation sipping a cocktail and reading that novel we have always wanted to we are committed to something. We are committed to lying by the pool, sipping a cocktail and reading that novel. Was it Yoda in Star Wars who said “There is no try, only do”? The extension of this concept is that whatever we are doing now is a reflection of our commitments.

Take for example “Joe” (fictional character # 1), who wanted to change jobs. Joe also wanted to maintain the financial security of his family. In fact Joe was committed to maintaining the financial security of his family and he was trying to change jobs. Joe did maintain his family’s financial security but at the expense of his personal well being as he became more and more frustrated with his current job and more and more frustrated that he could not find a suitable new job. There was misalignment between what Joe was committed to and what he thought he wanted to do. The challenge for us is to become truly aware of our commitments and either accept them or change them.

There is a four step method to confirm and implement commitments.

1. Confirm your commitments are truly your commitments

a. Write down the benefits

b. Write down the feelings that you expect when you are living your commitment

c. Discuss the commitment with a person(s) who is important to you (The level of excitement that you now feel about the commitment will indicate if you are really committed to achieving it.)

2. Eliminate the word “try” and the phrase “it depends on” from your vocabulary

3. Set up a structure to help realize the commitment. This could include.

a. Creating a diary of what needs to be done

b. Sharing your commitment with an important person in your life and asking them to support you

4. Reward yourself for achieving the actions that you wrote in the diary

Be aware however that sometimes there is a need to have a good hard look at ourselves to discover what we are really committed to. In Joe’s case he identified early on that his commitment to his family security was negatively impacting his ability to find a new job. But what about Jill (fictional character # 2) who for years was trying to lose weight). Jill was trying so hard that she really believed that she was committed to losing weight. But what Jill discovered with the help of her life coach was she was committed to a belief that she could not be thin and be safe. Jill had been going straight to step 3 of the four step process without doing steps 1 and 2. Jill was trying to do something that was in conflict with her commitment to her judgments and beliefs of which she was not consciously aware.

Commitment is another example of the power that we have over our life. One of the big keys to this power is self awareness. By becoming aware of our personal drivers of our beliefs and judgments (these are the tough ones as they may have been part of our subconscious for ever and so are not immediately apparent) we can make more informed choices and decisions about how to live our life.

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