Ten Steps to Help Your Business Thrive During a Bad Economy

Notes from My Handcrafted Soapmakers Guild Talk Part 2 of 3

Part 1 of this blog series can be found here. 

Step One:  Don’t Panic
Even President Obama’s community blog is declaring the fact that more millionaires were made during the Great Depression than in any other time in U.S. History.  An economic downturn of any kind is a great time to start a business.  Savvy entrepreneurs can edge into fields otherwise inaccessible to them in the past.  Many poorly run companies and those that are debt laden will close and new or solvent companies thrive in the empty spaces.  The only guaranteed way for you to fail is to quit.  Those that succeed refuse to give up even when to the outside world they appear to have failed.  Just get back up and do something different.

      

Sales of natural and organic personal care products increased in 2008 by 12.9% with an expected growth of 9.5% in 2009.  We are in the right industry, at the right time with the right products. 

Step Two:  Make 2% changes (or 1% or 5%)
Most CEOs and owners focus on improving the bottom line by doing one of three things and do not look at all three.  Successful businesses look at all three all the time.

Increase sales (2%)
Decrease cost of goods (2%)
Increase price of goods sold (2%)

If you did all 3 you have moved 6% to your bottom line and very few will see what you did.  You can make each 5% (and add 15% to the bottom line) or whatever % you wish but the idea is to work on many fronts.

Example of Increased Sales:
If you sold $1000 worth of product per month than you would need to increase sales by $10 (1%), $20 (2%) or $50 (5%) and that isn’t very much at all.  Anyone can increase their sales by $10, $20, or $50 in a month. 

Example of Decreased Cost of Goods:
If you currently buy Lavender 40/42 from Essential Wholesale you could decrease your cost of goods by buying in larger volumes.  Forecast your sales and chose the size that will work for you.  Increasing volume from 1 oz to 2 oz saves 14.5%, 1 oz to 4 oz saves 28.9%, 1 oz to 8 oz saves 43.3%, 1 oz to 16 oz saves 50.2%, 1 oz to 32 oz saves 57.5% and 1 oz to 25 lbs saves 64.2% on cost of goods sold per ounce. 

Example of Increased Price of Goods Sold:
If you sell a bar of soap for $5 currently than increasing the price by 1% would make the price $5.05, 2% would be $5.10 and a 5% increase cost would make that same bar $5.25.  All of these are price increases that are small enough to not impact the buyer and big enough to impact the bottom line for your company. 

Step 3:  Use technology to work smart

Essential Wholesale Examples
Newsletter = Constant Contact for weekly newsletters
Twitter = Follow us @EssentialU and @EssentialLabs
Blog = www.EssentialU.typepad.com
Facebook = Kayla Fioravanti                                                                                                 Websites = www.Essentialwholesale.com and www.EssentialLabs.com
VOIP Phone Systems = Designed for Small Businesses
UPS Worldship = Opens up world to you as customers
Endicia = Post Office Right On Your Computer          
Ongoing training = Soap Guild, Indie Beauty, E Commerce Diva

Step 4: Get the right people working on the right tasks  If you have a person with extensive web design skills filling bottles you might be wasting a valuable resource, especially if you are paying them extra for their education and skills.  Make sure you don’t have your high priced employees doing the mundane tasks that an employee at a lower cost could do.  And most importantly as the owner of your company don’t waste all of your time working in your business on mundane tasks that you could hire out and leave yourself with no time to work on your business. 

You are your most valuable salesperson, best cheerleader, and it is important that you spend your time working on the things that will help grow your business.  If it is just you running the whole show make sure you focus your time and attention on the things that will make you money first. 

Step 5: Use independent contractors to fill needs
Good examples of independent contractors are people who run their own company and come into your business to perform a function like a bookkeeper, CFO-to-go, public relations representative or lawyers. 
Just be careful if you are hiring Temps and not independent contractors because some of the new employment laws recently created now makes the employer responsible for any employee including temps and part-timers as it relates to benefits and unemployment when they are terminated. Consult a good Employment Law attorney for the changes in your state.  Not a general business attorney because you need a specialist when it comes to employment laws.

Step 6: Step up collection activities – if you have debt owed remember that you are not a bank  Most customers are push their vendors to extend their terms and most vendors are cancelling or cutting any terms for customers.  In these days, cash is king, as it should always be when it comes to owning and running a small business. This is not a time to go into debt – even to your customers.  Watch your cash flow and if you can’t tell me right now what is on your balance sheet then you are not watching your company close enough.  If you don’t know what a balance sheet is then you are not going to have stable growth much less any growth.  If you have customers that own you money then you need to collect if they are outside their terms.  Note that legally you have to send statements for at least 90 days in order to turn them over to collections. Also note that you’re A/R history is a key indicator to any potential financier.  They will want to know that you have a handle on your funds.

Step 7: Review your best sellers and bottom sellers alike and say goodbye to the dead ones  Focus on the top 20% of your products that bring in 80% of your sales and phase out the rest unless they are support products for your top sales items. On a spreadsheet list every single product you sell and put the total dollars sold next to each item. Sort them from highest to lowest and then determine which products make up the top 80% of total sales.  You will find that they will be your top 20% of products or SKU’s. 

That means in almost every business, that 80% of your inventory is only doing 20% of your sales.  But you are spending most of your money keeping those 80% of products in stock for that customer that orders them once a year.  And trust me, as soon as you get rid of that product that no one has ordered in 3 years, you will get a phone call from the one person that did 4 years ago.  And they won’t be happy, and they will even promise to buy it more often, but they won’t so you need to stick to your guns and get rid of it all, maybe even work out a deal for that customer and sell it all to them as a discount. Move those low volume items to the people that convinced you to bring them in the first place.

Step 8: Do the things on your to-do list that make you money first  Focus on the money making aspects of your business first.  We can all get busy doing busy work but set aside the most important tasks of our day.  It is easy to choose to do the easiest things first and then get around the hard things later (if you have time left over) and commonly the hard things are the things that help you make money.  Your daily to do list should say, “1st do hard things, 2nd do the hard thing that makes money 1st !”

Step 9:  Review your marketing
Take a close look at your company to make sure your company is sending the right message to your customers at the right time and that your products match your message. 

Step 10: Reduce overhead – trim expenses from multiple sources

10.1 Employees are often the number one cost of doing business.  Look to see if you can consolidate jobs and eliminate any redundancies.  Involve your employees in the solution.  Only do this if you want to create a teamwork atmosphere and only if you are really planning to incorporate their input.  No one wants to be asked their opinion if you are not going to take it.

This is a painful piece of advice for any employer but critical.  You should only keep A and B employees that on the way to being A players and everyone else let go.  People wonder why Essential Wholesale has such an amazing staff and the truth is that we have practiced this piece of advice for years.  We use nothing but the best ingredients in our products and keep no one but the best employees on our team. 

Go with your gut and act immediately and decisively. You know when the new person you thought was perfect is just not right and waiting 3 more months for them to change is only going to put you 6 months behind and cost you thousands in wages and training dollars. You should know within 2 weeks at the most whether or not that new hire is right. And if you have older employees that have been with you since your company started that have not been able to grow and change with your company as it has grown and changed then you really need to consider making them available to the market again. If they have shown no desire to change their knowledge base to becoming an asset of the company again, then stop wasting your time and money and hire up. 

10.2 Communication Phones, Cells, Faxes should be streamlined. EFax is free up to a certain number of faxes per month and nominal fee after that, Cell Phones could replace a land line altogether.

10.3 Leases Try to renegotiate any long term leases you have including your building rent, equipment or technology leases. No vendor wants you to fail and is almost always willing to defer or change your terms temporarily to help you stay in business. They lose if you don’t.

10.4 Reduce COGS  Buy in bulk to reduce your GOGS (Costs of Goods Sold).  Take advantage of any term deductions like the 1% Net 15 or 2% Net 10 options that many suppliers offer if you have terms.

10.5 Evaluate current expenses  Stop spending money on things that don’t add a single dollar to your bottom line. Changing packaging, printing new catalogs just to change a picture or two, upgrading your website and new shoes may all look good and give you a better image, but they will not immediately change your bottom line in a positive way.  During this economy, you need mitigate any new expense unless it is something you can sell for a profit immediately.

10.6 Fire Bad Customers  I bet if you were to look at your customers you will find that 20 to 30% of your customers do 70 to 80% of your volume.  And that the bottom 80% of your customers do only 20% of your total sales. You may even have 1 or 2 customers that do 10% or more by themselves. And you will likely find that the problematic/high maintenance customers tend to be in the bottom 80%.  They are never satisfied. 

You have to be willing to fire customers too. When you have exhausted all your resources and have jumped through every single hoop imaginable and the customer is still never happy, then that is a good sign that they never will be no matter what you do and they probably treat everyone else with contempt as well.  It may be time for you to invite that unhappy customer to find a new supplier as you do not seem to be able to meet their needs.  As painful as this breakup may be it frees us up to concentrate on serving the needs of the majority of your customers. 

Trust me, you will sleep easier when you know your customers are happy and if you are anything like us, we go to great lengths to do right by our customers in ALL situations.  As a company, we don’t believe the customer is ALWAYS right (we are all only human), but we do believe the customer should ALWAYS be treated right. 

10.7 Cut inventory by moving inventory  As long as you make money on your inventory whatever the margin, in tough times, you may need to lower your expectations on profits. Flat is the new growth and if you are holding out for higher profits then you may be hurting your long term momentum. Essential Wholesale just cut margins on all Essential Oils, Carrier Oils and almost all our Cosmetic Bases. We have built our business based on 6 to 12 turns a year on inventory which ensures that you only get the freshest ingredients.  We are not a company that will buy 2 years worth of inventory just to save $0.20 cents a pound.  We prefer fresh material and as you already know, we can still stay competitively priced without having to inventory 50 drums of Sweet Almond oil that will take 2 years to sell off. 

Part 3 of this series of blog posts on my talk from the Handcrafted Soap Guild will be up in the next few days.  It will include more data and facts on how to focus you business towards the growth areas of the natural and organic personal care market.  You can see the power point presentation from this portion of the talk here and in the next blog post you will find a link to the second portion of my power point that includes the growth graphs through 2013. 

Comments

[Scandle Massage Candle]

Love this! Thanks Kyla. You are such a wealth of information and a gifted writer.

[Christy, owner and founder]

What a blessing of information to help others. This not only helps my business but so many others whom are getting started. Thanks for the wonderful blog and God Bless you and your business!

Taylor Made Organics

[Marie]

I just found this, but it still is highly valuable! I started my business this year and I need advices like these. I will keep them and apply them!
Thank you for sharing.

Marie

[Larona Lollie]

Thanks Kayla. Wonderful information. I wasn't able to go to the soap guild conference, I'm so glad you are sharing some of the information.

[Leigh O'Donnell]

Awesome info, Kayla. Thank you for posting this for all those that may have missed your talk at the conference. :)

Leigh O'Donnell

[Donna Maria @ Indie Business]

Every single one of these tips is incredibly valuable. What they show is that anyone can successfully lead a small business if they focus on specific tasks and hold themselves accountable. Thank you for sharing this information and for including me as a resource. I am honored to be here with you.

[Jamila White]

Great info, Kayla! These are tips any kind of business can benefit from. I really liked your point about small changes (2%) adding up to big profitability without being very noticeable to others.

And THANK YOU for the shout out under "ongoing training"!

Hugs,

Jamila
The E-Commerce Diva