Monthly Archives: August 2014

What shape is your revenue?

When I ask a business leader

“What was your revenue last year?”

I’ll get a number as the answer. That tells me a little about the business, but from a business value perspective I want to know a lot more.

The next question is

“How many active customers do you have?”

This often leads to a debate about the definition of an active customer, but usually gets an answer fairly quickly. I think an active customer bought from you within the last 12 months.

There are two more elements that go to make up the revenue profile, how often does your customer buy (f) and what is the average order value (AOV)

The formula looks like this

rev shape

Where T is your turnover and n is your number of customers.

From the business buyers perspective, once n has reached a minimum level what matters next is the frequency with which the customer buys.

It is important not to become too reliant upon one customer and prospective acquirers will be worried if one customer exceeds more than 20% of your revenues.

A customer who buys from you once a year is typically worth less to an acquirer than one who buys 3 or 4 times a year.

There are exceptions. It might be that the once a year purchase is from a “Marquee” customer; someone you are proud to do business with and usually someone who commands instant name recognition.  If you are able to state “We supply John Lewis” that will count as a marquee customer, but other examples might be government business or the NHS.

The most valuable customers are those who are on long term contracts, where you are providing goods or more likely services.  These are very common as support services, for example in IT or building maintenance.

Within these contracts there are a few things to look out for to ensure you maximise the value.

A real “Red flag” for the buyer is if the contract contains a “change of control” clause, allowing your customer to break the contract if the ownership of your business changes.

It’s good to have contracts set up as “evergreen” where the contract automatically renews unless one party (or the other) gives notice, but within these there will need to be some form of pricing mechanism.  You don’t want to be trapped in a contract where your costs have dramatically increased, but you are unable to adjust your sale price.

If your business doesn’t lend itself to long term contracts, aim to move as far down that road as you can. Become an approved supplier or a preferred supplier or enter into some form of framework agreement – anything you can do to evidence a strong relationship with your customer.

If you want the best value for your business, you need to show that your revenues (and your profits) are growing, year on year.

That does not necessarily mean that you should keep adding new customers. If you can increase the frequency with which your customers buy, your revenues will grow. If you can increase the average order value, your revenues will grow.

 

 

Keeping your customer for longer

Most business leaders focus on the revenue line of the p&l and  are targeting increased revenues month on month and year on year.

What I often find is that the business only focuses on one element of revenue growth, that which comes from new customers.

Existing customers are “taken for granted” in the revenue plan. They bought from you last month / quarter, so they will probably buy again – and we know what they will buy, probably.

Your revenues are made up of several elements:

(Existing customers x existing quantities x existing prices) + (new customers x new quantities x new prices)

Most small businesses undercharge for their goods and services, but that is for another time.

Almost every business can improve its performance by reducing customer losses or “churn” as it is known in some industries.

Often businesses with large quantities of subscribers, like TV subscription businesses or mobile phone providers have dedicated teams known externally as cancellation departments but internally as retention teams. They are often empowered to offer the subscriber a discount or special deal as long as they stay a subscriber. My broadband provider gave me a deal when I threatened to leave just a couple of months ago.

Having a dedicated team like these is better than nothing, but it is a bit like bolting the stable door after the horse has bolted. These teams don’t go into action until after the customer has complained.

If you can, it has to be better to pre-empt the complaint.

One way to do that is to implement a customer care system.

A simple system can also help with your cash flows.

More business failures are caused by lack of cash flow than anything else, but even the most successful businesses can find themselves hampered or restrained by lack of cash flow.

There are many places where cash “gets stuck” in a business but one of the most obvious is in your debtor book, when people don’t pay you on time. That’s a big part of what is called the “order to cash” cycle, and if you can make that cycle shorter it will dramatically improve your cash flow.

Payment terms are one of the most overlooked conditions when business are negotiating supply deals, but even when the terms are reasonable getting paid according to those terms can be a challenge.

Most businesses don’t help themselves.

A typical scenario is this:

Day 1: Invoice date
Day 30: Due date
Day 45: First chasing letter
Day 52: Second chasing letter
Day 60: Payment arrives

Take a step back & ask yourself why we don’t do anything until 15 days after the invoice is due?

If there is an unresolved issue, you might not learn about it until 45 days after you thought you were done! That could be enough to put you in a deep dark hole!

As an alternative, try a “customer care” call on day 6. The call is to the person who ordered the goods or services:

“I’m just calling to make sure everything was OK with your recent order, and to see if there’s anything else we can help with?”

You might get an add-on sale, or an upsell at this point, and when you’ve dealt with that you can continue:

“That’s great, thank you. Now we sent off the invoice last week – I just want to make sure that’s all ok as well? Can you tell me who has to approve it – I don’t want to miss your payment run?”

At this point, you’ve had confirmation that the invoice has arrived and there aren’t any queries on it.

You also know who has to sign it off – if it’s not the person placing the order.

Take away all the excuses – “We don’t have that invoice/ there’s an error on the invoice/ it hasn’t been approved yet / there’s something wrong with the goods or service” and you will get paid faster.

Even better, you are now getting to the customer before they complain. You have a much better chance of keeping that customer for longer.

 

Buy versus lease? What’s the best strategy?

Many business leaders have to choose between buying and leasing when investing in capital equipment, whether that is plant and machinery, a building or vehicles.

In the early stages of a business, the decision is often made for you,. You can’t afford the cash commitment to complete the outright purchase so you have no choice but to take on the lease.

That might also be the case later in the business when the investment is really substantial.

However, when the choice is not obvious, it is worth considering the strategic, non-financial implications of your decisions.

Very often when I am helping an owner manager plan for the sale of his/her business I find that at some point the business has purchased the building from which it operates. That purchase may well have been an appropriate decision when it was made, but from the buyer’s perspective it is just a restriction. The buyer might want to consolidate operations, or perhaps significantly expand the business – yet they are constrained by the premises.

The buyer also has to fund the purchase of the property, at a time when it is possible their finances are already stretched to the limit to fund the purchase of the business.

I’ll usually suggest that the vending owner puts the property into their pension fund, which will then lease it to the business. The buyer has a problem or barrier removed.

It’s a similar story with plant and equipment. If it has been leased rather than bought, the barrier for you as the business leader to keeping up to date with the latest kit is much, much lower. If you buy a piece of machinery, that’s a significant capital investment. You will run it for several years to make sure you get full return for your money, but then you know it is time to replace it or more likely upgrade it. That may come at a time when business is not so good, when there are other demands on your resources….

Typically, if you lease over a 3 or a 5 year term, you can extend that lease (should you chose to do so) for a much smaller monthly lease amount. Upgrading the kit is not so painful, you just keep on paying the lease.

From the business buyer’s perspective, they don’t want to have to invest in capital equipment the day after they buy the business. You will be much more attractive if your plant and machinery is up to date.

It’s a similar story with vehicles. It’s tempting to buy the fleet, knowing that you can get an extra year or so from the vehicles, but there nothing worse than having your company name on a battered and tired fleet in 5 years time.

Buy versus lease? It is not a tactical decision, but a part of your strategy.

 

 

The right kind of customer?

In many businesses there no real selection or filtering of customers.

The focus of the business is on attracting prospects through marketing, and then converting those prospects into customers through the sales process.

Good marketing will (of course) be targeted or aimed at a particular customer type or group (and if your marketing is not focused, it will be less effective) but that doesn’t mean you won’t have prospects that don’t meet the criteria for that target group.

Some of those “wrong” prospects will become customers.

Some of those customers may be the wrong kind of customer.

Some time ago, I ran a business that operated a support desk. We had some customers who were so troublesome and took so much time to support that we actually didn’t make any money from selling to them.

The Pareto rule will probably apply; 20% of your customers are either low profit or unprofitable.

Your customers will fall into one of the 4 categories:

Before you analyse your profitability by customer, you might want to draw up the profile of your ideal customer, the one you believe will fit in the top right quadrant.

In the top left quadrant, you may well find that you are doing business with an ideal customer, but not enough business to make it worth-while.  Your focus should be on increasing the business you do with that customer.

In the lower left quadrant, you can change the way you handle the low profit customers. In the business I ran, we changed the support offering – limited the amount of free telephone support we offered, and backed that up with an extensive knowledge base to facilitate self support.  You may need to change your pricing model to drive those customers away, or at least improve their profitability.  We increased delivery charges on small orders for just this reason.

In the lower right quadrant, look to automate as much as possible. If you can automate dealings with a customer, from the order through to the cash, your costs of servicing the customer for that order will be very low. You will still need to review after sales support.

The customer in the top right quadrant are your stars, the ones you want to hang on to, the ones who are the most important to your business. You need a spread of customers here – Ideally no one customer should be worth more than 20% of your business.

Retaining your star customers is about building and sustaining a relationship with them. find ways to show your appreciation for their business, listen to their needs and wants and adjust your business to meet those needs.

Try to discover why your star customer buy from you, not the competition. We had one customer who bought from us because we were on his way home, but more seriously another showed great loyalty because one of our engineers met him at his customer’s site with the part he needed, enabling him to provide fantastic service to his customer.

Compare the profile of your real star customers to the profile you drew up before you started. Use that comparison (and the reasons why your customers buy from you) to inform and adjust your marketing.