To keep your struggling business afloat, work out your breakeven sales point (on a yearly basis) and then you implement strategies to help you sell more than this quantity.
It’s usually easier to look back after a business has failed and understand why than it is to save a business from failing in the first place. However, it begs the question of what an owner can do if the shop became a struggling business? It’s their “baby” and they are convinced they’re onto a winner, even if it isn’t working out.
The solution depends on many variables including what industry it’s in, where it’s located, what the size of the business is and what stage of its lifecycle it is at. In my experience, scale can often play a huge part.
Here are the first two of my top four tips to get your business back on track.
Do you know your breakeven point?
When I walk past retail outlets, I often wonder if the owner knows how many (or what dollar value) of clothes they must sell each and every day in order to simply breakeven.
One thing many businesses fail to do before even setting up business is a breakeven analysis. A business broadly has two types of costs – fixed and variable.
As the name suggests, fixed costs are largely fixed in nature, meaning you’ll have to pay these whether you sell one item or one million. While all costs are variable over time, rent might reasonably be regarded as a fixed cost. You will have this cost even if no customer’s walk in the door.
Variable costs are simply those that vary with your sales volume. If you are a wholesaler or retailer, the cost of your product might be a variable cost.
So, tip number one is to understand your breakeven sales point (on a yearly basis) and then break this down to a daily or weekly then implement strategies to help you sell more than this quantity.
Can you afford to grow?
You might be able to grow your way out of trouble, but do you have the necessary cash to fund that growth? Do you know how much cash you’ll need to fund your desired growth?
In order to answer those, you need to know one critical measure – your working capital burn rate. If you don’t know this, you’re flying blind. I often see businesses targeting a certain percentage increase in sales and when I ask them how much working capital they’ll need to fund that growth, they don’t know.
For some businesses, their working capital burn rate can be quite high. These businesses will struggle to fund rapid growth. For others, it can be quite low, in which case they will have an easier road.
You need to know yours.
Next week we’ll look at the other two key ways to get your business back on track.
Grant Field, Managing Director, MGI South Queensland and Executive Chairman, MGI Australasia