As a business coach I get an unusual opportunity to see the biggest mistakes almost all small businesses make. The biggest is: “I can't afford. . . . . , " “I'm having problems paying the bills. . . . so, let's cut costs!"
Avoid That Thinking as Your Dominate Mode. . . IF you want to Survive
That's not to say we don't look at expenses and fix them when necessary. However, as the dominate mode of managing a business, this is a business killer. It develops limits around our business rather than expanding what we can or should be doing. It puts most businesses into a downward spiral. It puts up barriers to problem solving instead of taking a positive action to fix the REAL problem.
What works is looking for ways to generate MORE money, more results, instead of limiting what we do.
Here are some questions to ask that will help you find the right answers, and the right actions. Finding the answers will quickly resolve your problem, where continuing in the cost-cutting mode will eventually kill your business.
- How much money do I generate for every dollar spent on my business, a return on investment question instead of cost avoidance?
- How much MUST I put in to generate what is needed to pay the bills.
- What is the multiplier for my business?
- What area of my business is causing the problem?
- What MUST be done there to generate MORE money?
Business Model That Works-Multiply Your Business Results FAST
Let's break down our business into a really simple model. A business is like any process that we can manage. Draw this in your mind, or on a piece of paper. A process is a black box, where you have an input (what you are feeding into your business). Put the input on the left side of the box. Inside the black box we are creating value (hopefully). What goes on inside that box is a multiplier of what we put in. (Put a BIG X inside of the box) And, finally the output (going out the right side of the box) is X times what we put in. For our business, the input is typically dollars and time. The multiplier inside the box is created by us, maybe by employees. And, what comes out is X times dollars more than we put in, probably some customers, a product, a service.
Input [$, time] -à [inside of our business - X] à Output [X times more dollars]After we get X dollars out of the box the first thing that happens is that some of it is eaten up by overhead (those internal costs that are there whether we sell even a dime, rent, utilities, insurance, etc. ). After paying the overhead, the rest can go into your pocket, or be used to grow the company further.
What Will You Do the Next Time You Can't Pay Your Bills?
Make sure to read this, even though you are paying the bills. This is IMPORTANT to understand. Many businesses don't. In seminar after seminar on business building, when I ask, “What will you do the next time you can't pay your overhead costs?"
The first answer is always, cut overhead (there's ONE of those cost cutting statements). Of course, overhead is, by definition, a FIXED cost. Which means there isn't much we can do with it? To cut out our rent, utilities, insurance, etc. is nearly impossible, and IF we could do it, it isn't going to happen immediately, leaving us with the problem that we were trying to avoid. It just isn't one of those areas where we can make a major impact, nor a fast one. The real opportunities are elsewhere.
When the people in the seminar get that, they always head for two distinct answers, we'll:
- Cut Marketing
- Cut Employees (for bigger companies that have employees)
Before You Can Take Action You MUST Know Your X, Your Business Multiplier
Money spent on marketing should always be evaluated by using the multiplier process model we talked about above. Ask yourself, “For every dollar spent on marketing [that's the input dollars in our model] how many dollars is generated by our business? What is the multiplier [the X] of our business?" This is where the whole room lets out a huge exclamation as they get the concept [expletive eliminated]. Because IF your business multiplier is a positive of greater than 1, ANY reduction in the dollars put in will always result in a reduction in the dollars out. You have just increased your problem instead of making it better. You just caused a downward spiral that, if not fixed quickly is the death knell of your business.
Now, let's look at the 2nd response, cut employees. Aren't the employees a part of the X? I'm certainly not opposed to cutting dead wood out of our organization. If someone isn't contributing to a large, positive X, they don't belong. However, for those employees that are a part of creating X, then we just did the same thing as before, reduced the output because the multiplier just went down.
What to Do When X Is:
- X is a BIG positive number, the right answer to the question of “What will we do the next time we can't pay overhead?" is to ask the question, “How many dollars do we HAVE to put into our business to generate EXACTLY the number of dollars we WANT out?" And then you HAVE to do it.
- X is positive, greater than 1, but anemic-We still have to ask how much do we HAVE to put in to get what we want out, but then we have an opportunity as well. What do we have to do to improve X, improve profit margins, remove the dead wood and replace it with BIG X generating people.
- X is 0 or negative we have a different issue. This is a business that, in its current state, is totally ineffective. No amount of pumping cash into the front end will fix this, not yet at least. We have to change the whole system, the X of our box, before we can even start generating an output. Key questions are:
- Can we carry the business until we get it fixed?
- Should we shut down temporarily until it is fixed by an improved business plan (which may control expenses. . . . maybe!)
- Or should we just close the doors?
- Are you in a cost cutting mode?
- Has it worked? Has it hurt you?
- Do you know your X?
- How much MUST you spend to pay the bills?
- How much MUST you spend to put whatever you want away in your pocket?
If you'd like to discover how to multiply your business results quickly, call to get a complementary evaluation of your business, identify the key critical measurements that WILL multiply your results, and identify the things to avoid. The results will be amazing, guaranteed.
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