Contrarian - a person who takes up a position opposed to that of the majority, no matter how unpopular.

We all need a contrarian – a person to challenge our thinking, a devil’s advocate to propose a different point of view.   They may be older or younger, more experience or naïve, their job is to make you think.

A contrarian is not the well-meaning person who tells you it won’t work or your own “lizard brain” telling you it will fail.  They are the person who asks the questions that make you think it through and extend your thinking or open your eyes to even more possibilities.

To often we fail to challenge the status quo assuming the way we have always done it is OK, whereas we need to constantly be reviewing our thoughts and processes to see whether there is a better way.

Some years ago at the Engine Room we made the leap to becoming a “cloud based” accounting firm – this was a significant change in the way we worked ourselves and they way we worked with our clients.  We consider it to be a better way to work with our clients.  It hasn’t always been easy, but it has given us many other benefits in data security and access,  and ultimately lead us to having a “less paper” office.  We are now focused on opportunities to leverage the changes we have already made.

What changes have you made recently?  The change going on around us is one constant in our lives, and in this technological age, it is moving even faster.

So back to my original question – who do you use to challenge your thinking?

Do you understand how to calculate the financial value of your clients and how you can use that value to make sound marketing decisions?

Less than one businessperson in a thousand really thinks in terms of the incremental lifetime value of their customers, or even knows how to calculate it. Yet the calculation and the very idea is easy and yields enormous benefits.

For one thing, if you know the incremental lifetime value of a customer, you can determine in advance how much you can afford to spend to acquire that customer. Moreover, you can reliably predict your cash flow well into the future.

‘Lifetime value’—a case in point

Lifetime value (or marginal net worth) is the financial value of your clients during the time they deal with you—their ‘lifetime’ at your business.

A case in point comes from a coffee roasting company with a mail order division. The company ran an advertisement that cost $12,000. The advertisement invited potential customers to accept a free coffee maker valued at $51.95 if they bought a sampler selection of fresh roasted coffee blends for $34.95.

Part of the deal was that the customers simply consider a ‘until further notice’ home delivery service—an order of their preference would be sent to them monthly and charged to their credit card. (They were under no obligation to sign up for the ‘until further notice’ agreement. They merely had to consider it. And regardless of their decision, they could keep the coffee maker.)

‘Until further notice’ arrangements mean that the arrangement continues until the customer gives the company notice to discontinue sending the product or service.

The hard cost of supplying the free coffee maker and the sampler pack leaves a net profit of $1.00 per response. When you factor in the $12,000 for an advertisement, you’d immediately conclude that 12,000 responses were needed just to break even, wouldn’t you?

Based on that, you’d probably think the coffee company would be mad to do it, wouldn’t you?

But let’s look more carefully at the numbers.

For each person who finds the ‘until further notice’ arrangement to be a convenient way to buy, the average annual gross profit is $245. So the response rate required to break even falls from 12,000 people to just 49!  Download our whitepaper to find out more..

WHITE PAPER: TOP TIPS TO INCREASE YOUR CUSTOMER'S LIFETIME VALUE TO YOUR BUSINESS

Many business owners are technicians who go out to work for themselves… When does it become a real business?

In the words of Michael Gerber – Business owners have an “entrepreneurial seizure”.  They look at their boss and think if he (or she) can do it then so can I.  What they don’t think about is the investment in plant, premises and staff that the Boss has made, or all the other work they do outside of the technical stuff – payroll, sales, marketing, debt collection, accounts payable….

In a small business the owner becomes a “Jack of all trades” and often at little recompense for those extra hours they have to spend doing the “administrivia” for the business.  If you take the income you earn and divide it by the real hours you work in your business – what is your hourly rate?  I have seen some owners where this calculation has them earning less than the minimum wage – often their employees are earning more than they are.

So is it a business or a job?

A business is something that earns you a return on investment over and above fair recompense for the hours you work.  The business makes a profit of $150,000 before owner’s earnings, a fair salary is $120,000, you have a business.  

It should also allow you to live the life you want – taking the leisure time you would like, doing the work you want to do.  Otherwise you have a job – and probably a poorly paid one at that.

How do you turn it in to a business?

Have a really good look at what you are doing - talk to your accountant about how you can improve the performance of your business. 

Be brutally honest about whether you can grow your business to generate the profits and cash flow to allow you to live the life you want to lead.

Then make sure you have the right team to achieve what you want, up-skill yourself and your team, create an action plan and go for it.. or make the hard decision – sell or close your business, get a job and live the life you want.

                                                  

You Must Educate to Motivate

Many businesses make an assumption that potential customers know who they are, what they do, how they do it, why they are better to deal with than competitors, and more.  Further, they also assume customers know and understand everything offered by that business. In most cases, this simply is not true - this can literally be a ‘curse’ on sales for that business.

Uneducated buyers are often left with no choice but to purchase on price. By working through this issue for your business, you can make sure you’re properly educating your customers.

You see, if customers are educated and, because of that better understand the benefits your business offers, price and other issues become far, far less important. Quality and value, experience, and other benefits become more important.

You also give the impression that you know what you’re doing, care about the customer, and want them to have the right information on hand, instead of showing arrogance by assuming they know how good you are!

You have to sell & ‘educate’ your way to business success or out of a business problem—you can’t just cut the price

An important point—your customers and prospects won’t understand or appreciate the value, your products or services, a bargain, the way you do business, or the benefits unless and until you first educate them to appreciate it.

Merely offering a product or service at a specific price (even the best price) doesn’t compel excitement or a response until you tell people what they’re getting, its value compared to other products and services, and why or how you can offer such value.

And that’s because customers buy the differences they perceive about your business.

Given that, it’s critical that customers understand the differences between you and your competitors—specifically, why what you offer is better than your competitors.

In fact, it is pivotal to tell every potential customer, in a benefit-oriented way, what your business does AND explain the way your business does it, so customers can more easily spot those differences. Otherwise they just won’t know why they should buy from you!

We are often asked if clients should have a family trust - the answer is usually "it depends".

Trusts have many advantages, but also complexities.

The purpose of a trust is to hold your assets in a safe place for the benefit of the beneficiaries (usually your family).  This come from the days of the crusades, when a landowner would be heading off on his quest and needed someone to look after his affairs and protect his assets for the benefit of his wife and children.

Once assets are in a trust they are no longer yours, they are held by the trustees for the benefit of the beneficiaries.  Any decisions made by the trustees must be in the best interests of those beneficiaries and the trustees can be held personally liable for poor decisions.

Despite many comments to the contrary the purpose is not to enable you to claim rest home subsidies in your old age!  (I personally believe that if you can afford to fund your retirement you should do so - rather than expect other tax payers to do it for you).  

Trusts do give many benefits - for example, the ability to protect investment activities from more risky business decisions, the opportunity to distribute your estate as you see fit, and protection of family assets from claims by your children's partners/spouses.  For you to maintain these benefits your trust must be managed correctly, with major decisions minuted.  Trustees who are also beneficiaries must be careful not to use the trust cash as a spare bank account to fund their day to day living as this risks the trust being seen to be a sham.

Generally if your only assets is a family home, with no children, and no business interests, there is no significant benefit in having a trust - an up to date Will is sufficient.  When there are children under the age of majority, with the likelihood of inheriting significant assets, a trust can help to ensure that the assets are used as you would wish after your death. The more income earning assets you own, the more likely that there are benefits in having a trust.

Whatever your situation, it is important that you work with both a lawyer and an accountant to ensure that the correct structure is used to give you the best protection.

If you only meet with your accountant once a year it is vital that you use that time to really understand how your business is performing and what you need to do over the next year to achieve your goals.  

The three key questions are:

1.  How did my business do compared to the previous year?

Sales may be up but profits down (or preferably sales are down, though profits are up).  Understanding whether this is a trend or caused by a one off event is essential to making decisions on how to have a better year.  

2.  Where has the money gone?

Often business owners are hit with a tax bill at the end of the year but have no cash available to pay it.  This may be caused by cash tied up in stock or debtors, or because cash taken out of the business by the owner is greater than the funds generated.  Often cash has been used to fund growth in the business without any cash flow forecasting. (If you want to know more check out our next 'where has the money gone?' seminar at www.engineroomca.co.nz/events ).  Cash is always King - if you cannot turn profit into cash your business may be growing too fast, or you are neglecting to put enough time into managing your business finances.

3.  Is my pricing right?

Pricing is 20% science and 80% art, but fundamentally if you are not making a profit on every sale, you need to review your costings and how you set your price.

4.  What is my business worth?  

While valuing a business is a project all of its own, your accountant should be able to give you an indicative valuation.  Understanding what your business is worth is vital to making decisions about getting it ready for sale, retirement and succession.

These three questions will lead to a whole lot more...

What can I do to increase sales?

How can I increase my profit?

How do I keep more cash in my business?

What do I need my business to be worth to fund my retirement?

I'd love to know what key questions you ask your accountant to help you with building your business.

All successful businesses make a decision at some point to either be big or special.  If you look at successful businesses in your community they are either big to get economies of scale and buying power, or special because they are very good at doing one thing - they focus on their niche doing it very well.

What is special about your business?  What makes you different?  What makes your customers come back?  

Unless you are the only mechanic in town (or plumber, or accountant , or whatever) or have a truly innovative new product, you need to find a way to make your business special.  Price cutting - while the differentiator of choice for many business - is usually just a quick way to go broke, with every reduction in price coming straight off your profit and cash flow.  

If your product or service doesn't have features that no-one else offers, customer service is usually how business differentiate.  While customer service can be quite cheap to implement and often offers businesses the opportunity to charge a premium, it is easy to copy. Fortunately for the innovators, many business owner/operators are too busy working in their business to focus on improving customer service. But there are always fast followers or imitators, so innovators need to be constantly looking at how to lift their game.

Not sure what you can do? Ask your team for their ideas and ask your clients what they think.  Then choose one suggestion and implement it.

There are a few principles small business owners need to understand if they want their business to last:

1.  It is not what you make it is what you keep (cash is king).

80% of businesses fail in the first 5 years - most of these are profitable, they just run out of cash.  No matter how good your sales are it is the profit that counts most - and more importantly the the cash you retain.

A sale is not a sale until the cash is in your hands - whether you sell furniture, property or time it is not a sale until you get paid.

And the cash that is left after you have paid manufacturing costs, overheads and taxes is yours to live on or re-invest in your business.

2. Borrow only to buy assets.

As our grandparents and parents who lived through the 1930's depression will tell you, never spend money you don't have.

An asset is something that either generates income over a period of time or goes up in value.  A car is an asset if the person driving it is earning you an income or saving you money. Stock is an assets if you turn it over regularly otherwise it is  a liability

A holiday is not an asset, neither is furniture or shoes or a computer,.

3. Reduce debt as quickly possible.

They only personal who benefits from long term borrowing is the lender.  To understand this calculate the total payments over the life of your loan and deduct the principal.  Banks want you to extend your loan, and add to it if possible.

4. Always understand your financial position.

Seeing your accountant once a year to see how much tax to pay is not enough financial information to run a  successful  business.  A good business owner knows what their monthly operating costs are and checks each month to ensure they are not exceeded.  They also know what sales they have to do to meet their costs and monitor this throughout the month.  

Poor debt collection and stock management is the downfall of many businesses. If your cash is tied up in stock and debtors careful management is required.

5.  Know what you are good at (and what you are not)

Nobody is good at everything - well not many of us - and limited time generally means you cannot do them all.

Focus on the few things that you do best for the business and employ or contract out the rest. Never abrogate responsibility - you may not be good at finance but you still need know that the job is being done right and what the results are to use that information for decision making. (Your accountant should be able to tell you the key numbers to watch in your business)

6.  Put something away for a rainy day..

There are two types of business - those you can sell and those you can't.

A business that sells well doesn't need the owner working in it every day and generally has physical assets and/or stock or a process to sell. Everything else is just a job by another name.

If your business falls into the former category to maximise your sell price your emphasis needs to be on having a well run systemised business in a good market.

If you really just have a job by another name - for example you are a self employed contractor, your only asset is really your customer base and this is likely to have a limited value to anyone else.  Your earnings are generally restricted to e number of hours you are available to work.  The secret with this type of business is to maximize your earnings and invest those in assets that generate passive income such as dividends, interest and rent.

I have just returned from India, one of the fastest growing economies in the world.  Since the my last visit two years ago the increase in infrastructure development has been huge.  As we left Agra and hit the first of the road toll booths our Guide explained that they were happy to pay as the new highway had reduced the travel time to Jaipur by three hours. The people of India clearly see development from a much more positive perspective than us and realize that their Government cannot afford to pay for everything.

Development is not hampered by the complex regulation of the west - some of which is a bad thing as there isn't even a minimum health and safety standard. But it also means things happen much quicker.  In the last 20 years the living standards for the lowest classes has moved to where the middle class were, and it is moving faster all the time.

Unemployed are offered work on a day by day basis.  If they register as unemployed and turn up at their local meeting place they are guaranteed a miminum wage of 220 rupees ($5.10) per day. If they are not offered a job as a day labourer at a better rate they are assigned jobs for the council working on roads, gardens and other developments.  

Much of the economy runs on cottage industry but as they become more urbanized the biggest problem will be managing demand for higher wages.

There is a significant emphasis on education and health with new educational facilities being built everywhere to cater for the needs of the lower and middle classes.

Sadly in New Zealand we no longer seem hungry to improve ourselves - now we think it is someone else's job to do it for us.  For all our talk of being entrepreneurial and number 8 fencing wire, we would rather go to the beach an earn the minimum we can for the maximum lifestyle.  It is time we raised our goals before we are taken over by the ambitions of countries like India.

No one said you had to have a degree in marketing when you went into business, yet active marketing is one discipline that is critical to the success of a growing business.  See if the following sound familiar: 

1. Not tracking marketing promotions.  If you don’t track responses from a promotion, how do you know if it was worth doing?
2. Failing to retain customers.  It costs six times more to get a new customer than to keep an old one.  Don’t get so caught up in marketing for new customers that you forget your regulars.
3. Not having a USP ‘elevator speech’.  Focus on your solution to the customer and make sure it describes in simple terms "what's in it for them".
4. Not including a call-to-action in your advertising.  The incentive doesn’t have to be expensive as long as it is adding value.
5. Not thanking referrals.  Remember, people like to be helpful but they also like to be thanked.