ActionCoach Team Sage: Blog

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A few decades ago Dolly Parton brought out a song about working 9 to 5 for the movie of the same name. This song reflects the industrial age view of how business is supposed to work. Employees show up at opening time and go home at closing time. The business is open for certain hours. That model still dominates the retail market.

Unless you have a store front where customers visit physically, does this model make sense in today's world?

An increasing number of information and personal service businesses are abandoning this traditional model. They are realizing that focusing on hours worked instead of results is counterproductive.

Emphasizing 9 to 5 is Counterproductive

Think about it. Focusing on a 9 to 5 schedule can actually reward the "wrong" behavior. Instead of focusing on getting the work done to produce the best outcome, employees focus on other things:

• Being at their desk so managers know they are there
• "Looking busy" instead of actually being busy
• Coming in early to show they have initiative, even if they do not
• Staying late to show their dedication, even if they have none

There is an Alternative

So, what is the alternative?

The other way of handling business is to give the person an assignment and leave it up to them to decide when and how to produce it. You give it to them with a deadline and a specific outcome. They do the rest.

This model actually encourages employees to be more productive and happier.

• They work the hours that fits their personal working style. Some people work better in the early morning. Others work best in the afternoon. Still others get the most done at midnight or after.
• They are more productive. Working on their own schedule makes people more efficient. Instead of staying after work to show dedication, they get more done in less time and raise their productivity levels.
• They can fit their professional lives around their personal lives. One of the main complaints of many people is the fact that their jobs take too much of their time at the expense of their personal lives. With this alternative model, that is no longer a concern.
• They will be happier as a result. Without the stress of working to impress the boss, people have more control over their life and their time. They give more of their creativity and passion to their jobs. They feel as if they are adding value to their company.

This model does pose challenges to people who are used to the traditional 9 to 5 schedule, although they don’t have to work any other way. The point is, everyone gets to work the way that works best for them. That means effective communications will be paramount and the work flow may have to alter to accommodate the new methods.

Companies that want to adopt this business model are smart. It takes a bit of time to plan and implement. There will be snags along the way. But, companies that have made the transition show it in the results they see.

Well, let's look at the good news and the bad news.

The Bad First

Let's look at the bad news first. (Take note, this is not one of the business growth strategies recommended for any company.)

Many companies are making a major mistake. They are working with the model of planning being a top-down activity. The managers come up with an idea and tell their employees what to do. Simple. Straightforward.

Now, top-down planning has its advantages. With this type of style, everyone has a clear role. The employees do not worry about being upstaged by another employee of the same rank. They know not to make suggestions to managers since it would have no impact. Managers don't need to deal with employees giving them feedback when they don't want to deal with it.

Of course there is a down-side to this strategy. With top-down planning, employee morale is bad. Employees, who may be creative and innovative, are told they have no voice in the situation. It demoralizes innovation and initiative. In fact, employers will not see the talent available in their employee ranks. Employees with potential will get so dissatisfied with this situation, they will leave for another job when the opportunity arises.

Sounds like a nightmare in the making. There is good news though. You do not have embrace top-down planning in your organization.

The Good News

One of the strongest business growth strategies to embrace is the idea of implementing bottom-up planning. This type of environment encourages employees to come up with ideas and to figure out better ways to do things. Now, that does not mean that an owner or manager will not come up with ideas and implement them. The difference though is that they engage their team in the conversation.

What are the advantages to the bottom-up approach when it comes to management ideas?

• Your idea can become better with input from the people on the front lines. Think about it. Your people are the ones that deal with the everyday work. They know what is working and what is not. When you have an idea, they can tell you if it will work or not. They can come up with suggestions on how to make your idea even better.
• Bringing your idea to your employees first also gives them a voice in how to implement it. They may suggest things you never considered. They may give you comments that will lower costs and make the implementation easier.
• People who have a say are more likely to step-up and take more responsibility without being asked. They feel they have a part of the idea and want to be an intimate part of its implementation. That sense of ownership is vital for successful idea adoption.
• You are gaining employees' buy-in to the idea. And that is more important than just about anything. Many managers have faced a situation where they are trying to make a change but do not have employee buy-in. Without cooperation from the front lines, even the greatest ideas can fail.

These are just a few of the advantages of bringing your employees into the discussion when it comes to ideas and their implementation. You will find your organization transforms when you start doing this. That is what makes this one of the smartest business growth strategies to implement in your business.

So, do you know what your real business is? You may say selling product X or providing service Y.

In reality, your business is acquiring customers and keeping them happy. No matter what product or service your company provides you must have customers interested and buying what you have to offer. The efforts you put into marketing your company and brand is money spent towards acquiring a customer. You are buying your customer with those efforts and that investment is your customer acquisition cost.

What is Your Cost of Acquisition?

Customers come with a cost attached. Before someone becomes a customer, you spend money in marketing efforts to bring that person to your company. This is true of a store front operation as much as for a completely online business.

How do you calculate this cost of acquisition? There are various ways to do it. But, a simple method is to divide the monthly cost of your marketing efforts, website maintenance, and other customer outreach efforts, by the number of new clients you get in a month. For example, if you brought in 100 new customers last month, and all the marketing costs for the same period came to $1200, your cost of customer acquisition is $1200/100, or $12 per new client.

If you track how clients come into your business, you can track customer acquisition costs by channel. For example, if someone comes in through your website, you can calculate that cost based on your web marketing efforts. If someone else comes in to your retail space due to a sales flyer, you can calculate that cost based on your traditional marketing efforts.

Are You Paying the Right Price for Your Customers?

There are two approaches to this: Allowable Acquisition Cost and Investment Acquisition Cost.

• Allowable Acquisition Cost - This is what you can easily allow for when buying a customer. Usually, this is the profit of the first sale. If your average profit on a first sale is $10, you do not want an acquisition cost more than $10.
• Investment Acquisition Cost - In some businesses, the cost of acquisition is higher than the profit margin of the first sale. The money invested in a client is based on getting them to make multiple purchases to cover that acquisition cost. You can recoup the cost on the third purchase or the tenth, depending on the investment.

Ideally, you can work under the Allowable Acquisition Cost model. However, you may find that your first acquisitions are based on the Investment Acquisition Cost model. As you increase your lead generation and conversion efforts, you should see your acquisition costs going down.

No matter what model you use though, you need to keep customers coming back for the most profitability. Providing excellent customer service, quality products/services, and competitive pricing is very important to make this happen.

Something to Remember

Your acquisition cost is affected by how much "stock" you have on hand and how fast you turn that stock over. In the business of acquiring customers, your "stock" is your leads. 

Remember, leads are perishable. Leads will buy from another company or lose interest in your company. If you do not turn those leads into paying customers in a timely manner, you need to invest more money into generating more leads. And that will make your acquisition costs go higher.

What do you take from this? Know how much you are paying for acquiring your customers. Seek ways to bring those costs down. One way to do that is to increase your efforts to convert leads into paying customers before the leads go stale.

Are you selling yourself out of business? You may think that is a silly question. You have plenty of sales. You are seeing a steady growth in your sales numbers. Of course you are not selling yourself out of business. Or are you?

In reality, you may be doing it and not really realizing it.

Let's put it this way. What is your gross margin? Is it enough to pay your fixed expenses? What is the gap between when you pay for goods and when you get paid for those same goods by customers? If these numbers are off, you are literally selling yourself out of business. 

Let's break it down.

What is Gross Margin?

Gross margin is the difference between the selling price of your goods and the cost of the goods sold. So, if you made $1000 in sales, but it cost $500 to buy the goods from your suppliers and sell them to customers, your gross margin is $500. That is the amount of money you have to pay fixed expenses with.

Why is the gross margin so important? You need to calculate how much you have to sell to cover all your fixed expenses. That gross margin tells you that critical number.

Variable Expenses vs. Fixed Expenses

You need to know the differences between variable and fixed expenses. They allow you to track the costs you can control and the ones that will vary depending on your sales figures.

• "Variable Expenses" are the ones that will change based on the amount of sales you're doing.  Another term for this is "Cost of Goods." This number covers all the costs associated in producing a product or service. This includes the cost of materials and direct labor, along with shipping costs and sales commissions. One way to think about these costs is "Would I have incurred this cost if I did not make a sale today?"

·         If you are a wholesaler, your purchase cost is your variable expenses as well as shipping costs and sales commissions.

·         If you are a manufacturer, the costs of raw materials and labor to make the product is in the variable expenses, along with shipping expenses and sales commissions.

·         For a service provider, the wages of those directly providing the service as well as the cost of supplies are part of the variable expenses.

• "Fixed Expenses" are the ones that do not change based on sales. A term you might hear used with this is "Overheads." Some examples of fixed expenses include rent or mortgage payments, utility bills, wages to administrative employees, and office furniture.

Cash Gap

The "Cash Gap" is the time between when you pay for goods and when the customer pays for the same goods. For example, you paid for widget X on January 1. You sell widget X on July 1 for cash. Your cash gap in this case is 6 months. This is a very simple example, but gives you the idea. 

Why is this important? You have tied up part of your cash in the purchase of inventory. You will not see that cash released until you receive payment from a customer's purchase of that inventory. If you tie too much of your cash into inventory and do not get cash flowing from sales, or you don't take into account that each time you sell your products you have to reinvest in additional product, you will see your operating funds dry up in front of your eyes.

What Does All of This Mean?

To be profitable, you need to generate enough sales to cover both variable and fixed expenses. Even more important than immediate profitability is cash flow. You need to sell enough to keep the cash flowing through your business.

How can you free up your cash flow and improve your gross margins?