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Value Adding News - April 2009

Welcome to Maxell Consulting's newsletter - Value Adding News.

The newsletter is designed to help businesses increase their value, make their business more attractive or have greater confidence about the decisions they are making about the future of their business.

In this month's issue

How consolidation can increase the value of your business

The value of a business is largely dependant on its cash flow – the more cash you generate, usually from profits – the more valuable it is.   In the current climate growing profits through revenue growth is not possible for most businesses.   But you can increase the value of your business by consolidating so that your profitability improves.  

In this situation the aim is to increase the profit margin of the business, rather than the amount of profit.  Effectively you are trying to increase the efficiency of your investment, and when demand for your products and services do pick up the business will generate even more profit than it did before.

How do you consolidate? 
  1. Understand very CLEARLY the core competencies of your business and the clear offer to your customers.
  2. Identify who the core customers of your business are – the 20% of customers that give 80% of the revenue.
  3. Calculate the profit contribution of the core group of customers and also the profit contribution of the rest of your customers.
  4. Identify who is the bottom 10% of your customers by profit contribution.
  5. Identify what activities and assets you no longer need if you scaled back your business to focus on the top 20% of customers?   Ask the same question of the bottom 10% of customers.
  6. Identify strategies to “eliminate” the bottom 10% of customers through price adjustments, reducing the products and services you offer or choosing not to do business with this group.
  7. Reduce your asset investment and cash in the funds from these asset sales by focusing your activities on your core customer groups?
  8. Adjust your plans and activities to service your core customer groups.
  9. Implement key business systems that “automate” the process of servicing this customer group.
  10. Identify some of the new trends and changes that will happen as the economy picks up again, and how you can grow your business in this direction.
How does this increase the value of your business? 

The value of your business will increase for two reasons: 
  1. Your cash flow will increase as you stop dealing with customers that are reducing your profits.   You won’t need to try very hard to reduce costs, as not dealing with your “most expensive” customers will reduce your costs anyway.
  2. The consolidation process will necessarily improve your profitability, and hopefully reduce the asset base of your business.   This will improve your return on invested capital, which will make your business look more attractive to a strategic buyer.
So what are you waiting for?   Which customers are costing your business profit?   Which customers are reducing the value of your business?

Need help calculating the profitability your customers?   Want to know the impact consolidation can have on your business value?   Register for a Value Assessment and find these answers now.

Get rid of your bottom 10% of customers (and increase the value of your business)

As much as most business owners hate the thought of giving away customers, we can all agree there are some customers that give you the willies!   Some of these customers are hard to deal with but you tolerate them because they are strategic customers that might develop into larger fish later.   Others just plain cost you profits.   This article is concerned with the minnows in your pond that just clog up the profit making process.

Ideally all your customers should generate a gross profit that covers the overheads of your business.   But few business owners actually break down their customer list in this way.   By following a simple 4 step process you can identify the customers that cost you profit (and hence destroy value in your business) and then find ways to cut them loose or turn them into profit contributors.

Step 1:   Calculate the contribution margin by customer.   The contribution margin is not just the raw materials and product and service costs, but also:
  • The labour costs of dealing with the customers.
  • Equipment costs associated with providing the products and services.
  • All operating costs directly associated with providing your products or services.
Step 2: Rank the customer list by contribution margin and identify three core customer groups:
  • The top 20% of customers by cumulative contribution.
  • The bottom 10% of customer by cumulative contribution.
  • The remaining 70% of customers.
Step 3:   Identify the gross profit contribution that the bottom 10% generate for your business.   Very often these customers actually lose you money or at best are a break even group.

Step 4:   Separate out the strategically valuable customers that realistically will increase their spend with your business soon.   Be ruthless – only pick out the businesses that are likely to spend at least 3 – 5 times more with you in the next 6 months.

Step 5:   Develop strategies to turn the remaining customers into profit generating customers.   These strategies can include:
  • Increase prices for the key products and services offered.   If you offer services then develop a private list and make sure future proposals include higher prices.
  • Develop a communications strategy to this group of customers that highlights new products or services that the customers might be interested in.   Find ways that you can increase their total spend and hence contribute more to your profits.
  • Change the terms offered to customers that spend below a certain amount.   Ask for cash up front, credit card details or a higher initial deposit.
  • Simply choose not to do business with them.   In some cases you may be able to politely tell these customers that you no longer accept orders below a certain value, or that they are no longer within your focus area.   Above all be polite and offer alternatives for them to increase their purchases or find other supplies.
This process should be adopted on a quarterly or half-yearly basis by all businesses and is an integral step in the consolidation process for a business, described in the first article in this newsletter.

If implemented correctly, this process can increase the profitability and cash flow of the business and increase the value of your business in the process.

Do you need help calculating your contribution margin by customer?   Or do you need to identify different strategies to turn your worst customers into your best ones?   Give us a call or register for a free phone enquiry, and we can provide you with more ideas to deal with your worst customers.

Companies In The News

Learn from companies in the news.

  • Asciano is a great lesson for small business on how not to restructure your business.  Amongst many things the directors of the shipping and transport business have been accused of taking too long to review and sell off parts of their business.  Now they are faced with selling the farm to stay in the game.  If you’re going to consolidate - do it once and do it fast.
  • Pacific Brands have perhaps taken the big hit early with the decision to exit domestic manufacturing.   With many textile-related businesses going under, they have taken the step to cut deep and cut early, and hopefully stay away from any liquidators for now.   Mind you the implementation left a lot to be desired.
  • Diversified Mining Services Ltd (DMS) are a good example of picking the timing to mount an ambitious acquisition strategy.   They recently acquired six related businesses that will bolster revenues at a time when mining-related businesses are scaling back.  The acquisitions will not only grow the business but provide new opportunities in the future including an ASX listing.    If your business is well positioned, well executed acquisitions are a great way to grow your business, and now will be at attractively low prices.

Latest Economic News

The economic news that may impact your business value.
  • IBISWorld recently forecast that the global shipping industry revenue will fall by as much as 10% as a result of falling shipping volumes.   With falling profits in the industry, prices are likely to rise, increasing the costs of imported products.
  • The International Monetary Fund has forecast the global economy will shrink by as much as 1% in 2009, with advanced economies expected to shrink by as much as 3.0 – 3.5%.  This is equivalent to one year's growth gone!  Make sure you factor in a conservative sales forecast for the coming financial year - demand will have to drop for many businesses.
  • Whilst some sectors of the food industry are doing it tough with drought, fires and floods, there is some fundamental growth opportunities that exporters can target.  With over 20 million people in China shifting from semi-poverty rural lifestyles to middle class suburban lifestyles, the demand for more urban style food products will increase.  This can add a lot of value to businesses that are struggling to maintain sales at the moment.

Quote of the Month

  • The importance of money flows from it being a link between the present and the future. (John Maynard Keynes)

Value Adding Ideas

  • Implement a formal monthly program of reporting on your sales and customer performance.  Make sure the reports highlight new customer sales, as well as sales value by customer.  Circulate the report with key sales staff and establish a regular meeting to review how sales to your worst performing customers can be increased.  The reporting system will help to increase valuable cash flow and demonstrate to any future buyer that the business is proactively managed.

Client Case Study:  Bringing in a new partner

  • Maxell Consulting was recently asked to help the owner of a training business develop a realistic value of the business to enable a new partner to be brought on board.  A new partner was offered a percentage of the business in return for an equity injection.
  • The new partner was an existing manager that had demonstrated good capacity to grow the business, as well as have valuable industry experience.
  • The business value range was used to guide the negotiation process and provide an independent basis for valuing the overall business.  The value range took into account previous demonstrated business performance as well as the growth opportunities the management team had developed.
  • Outcome:  The management "buy in" gave the owner a future exit strategy and increased the level of ownership and commitment of the existing manager to the success of the business.  The smooth transition limited the impact on daily operations of the business and enabled a clear focus on future growth opportunities.
Contact Maxell Consulting to discuss how your business would benefit from a valuation and the options you have to increase the value of your business.

Next Month's Newsletter

  • Finding a buyer in tough times. 
  • Critical systems all businesses need.
If there is something you would like to find out about, let us know by sending us an email or by going to our Contact Us page and filling out the enquiry form.  We want to provide you with the information and help that you need.  We are only too happy to find out about what you want.

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