Income stagnant, but costs are rising?

It usually starts with a phone call requesting assistance with reducing the owner’s working hours, or their stress levels — in other words lifestyle. Many people come to us because of a lack of balance in their lives. After many years doing this kind of work I’ve come to realise that a request for help like this usually masks other, more serious issues, and I have to proceed quite carefully.

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What would I find if I looked at your accounts?

I normally start by examining their accounts, going back a year or two. There is no point trying to give advice to a business owner until you have a good understanding of their financial position. The information I’m given can be quite unsettling — a surprising number of small and medium sized businesses have no proper, timely accounting and rely on an annual summary from their accountant to tell them how they have done for the year.

Even if they do have monthly figures, a disturbing percentage seem to have no real understanding of what the figures are telling them, and confidently hand over accounts that indicate a current or approaching disaster.

These are the people who are running their businesses by intuition and the seat of their pants.

Charging enough?

If you can’t put your prices up, you can sell more to each existing customer.

There was a time, not too long ago, when you could do this with confidence and still make a good profit. The economics in the industry were different then, but selling prices for products and services have not risen in proportion to costs and profits have declined.

If you have a range of products and services that are priced competitively, yet the profit and loss is showing what I call ‘the Trifecta’ — high cost of goods sold, high wage costs and high overheads — this is the classic indicator that your selling prices are probably not high enough for the costs involved.

The simple solution would appear to be to just put all your prices up, but you can’t normally do that for fear of pricing yourself out of the market. The only viable solutions are to lift the customer average spend, or to decrease all the costs involved in running the business.

sales and merchandising

You can boost your sales up to 25% using modern sales and merchandising techniques

Customer average spend

Lifting the customer average spend is easier said than done, but is attractive in that it has a tremendous potential to add substantially to the bottom line of the business, and I normally examine this option as a preferred way to proceed. Unfortunately, in most businesses there are issues of inappropriate staff recruitment and training, together with a lack of understanding of the art of merchandising that will thwart attempts in this direction.

I am then left with the only option being to reduce costs, knowing that this can be quite a traumatic process for all parties concerned. The trauma comes from the need to challenge all the prevailing sacred cows and make radical change to the way the business is run.

Controlling major costs

Cost of Goods

To illustrate this, consider the cost of goods. In order to reduce this I have to review all the recipes, the current suppliers, goods receipt, systems of production, wastage, staff meals, etc. and tighten right up on all of them, finding a percent here and a percent there. Rarely is there one ‘magic bullet’ that will find four or five percent in one hit.

self serve

You may need to simplify your service and production systems to reduce wages

Wages

When we move into wage cost reduction, it gets even uglier. The first thing I have to do is challenge all their systems of production and service, looking for ways to cut down on staff time while still delivering an acceptable perception to the customers. This often leads to ‘robust discussions’ with the owner about things like cutting out table service, or switching to the use of pre-prepared or semi-finished products instead of doing it in the old, time consuming manner. These kinds of changes — which can be quite confronting — are absolutely necessary if we are to restore the business to financial health. It sometimes gets pretty weird, I’ve had the experience with one business owner who said, with a straight face and without realising what a dill he sounded: ‘I want you to fix it, but I don’t want you to change anything. I like it the way it is’.

After looking at production and service systems I have to look at other wage cost issues like the productivity of the staff, average rates of pay, rostering efficiency, staff turnover and absenteeism. In short, a complete examination of the way human resources are managed and supervised in the business.

overheads

Form ‘project teams’ to reduce at all your overheads

Overheads

Finally, I have to attack the overhead costs in the business. The biggest one, and the most difficult to deal with is the rent being paid to the landlord. I prefer to see the rent on a hospitality business being no higher than 8% of the turnover of the business, unless it is located in a very high pedestrian traffic area, and we can offset high rent against low marketing costs.

If the rent percentage is high we have two quite difficult choices — negotiate the rent down (difficult), or we’re back to lifting the income of the business via customer average spend, in an attempt to bring in more money and automatically reduce the rent percentage.

At this point the poor owner is sometimes thinking that it’s all getting a bit too hard. The question of selling out normally crops up. After all why not exit stage right with a bag of money and leave the problem to some other hapless soul? Well, the bad news is that the business is worth a multiple of its true profit. Minimal profit, minimal selling price. Check mate.