Tag Archives | strategy

Setting Prices

When we start working with a new client, one of the first conversations we have is about setting prices.  A company’s pricing strategy (and whether they have articulated it) tells me a lot about the culture of the organization and how they make money.   Here’s a video that discusses different pricing strategies as well as which strategy will yield the greatest return.

Discover 3 Things You Should Know About Setting Prices

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We developed a Pricing for Profit Inspection Guide that you can access here for free.

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3 Benefits of an Analysis of Customer Profitability

analysis of customer profitability

Over time weeds grow in any garden. In the same way, unprofitable customers work their way into your company. To avoid the high costs of low profit customers, you should perform an annual analysis of customer profitability. Therefore, weed your garden of customers who are sapping your profits and cash flow.

Although there are many ways to look at your customer base, some of the factors to consider are sales volume, gross margin, profitability, number of transactions, and average sale per transaction. Looking at this information will not only shed light on those customers who are a drain on company resources, but highlight opportunities to sell more to higher margin customers who have low activity.

Analysis of Customer Profitability Benefits

1.  The elimination of customers that are costing you money.

Sometimes the costs may be indirect. Firing the customers with low gross margins is straightforward, but what about the customers that pay a good gross margin but require a lot of effort from operations? Not only do you need to address gross margin but you need to consider the costs to service that customer.

2.  Focus!

If you get rid of the clients that are high maintenance, then it frees your organization up to focus on the more profitable customers. While a successful strategy might be to cross sell additional products or services to those clients who value the relationship, another strategy would be to target new customers with the same characteristics as the good clients you have today.

3.  Increased Productivity Across the Organization

The benefits of weeding out high-maintenance, low profit customers will reach across the organization.  The sales department benefits by focusing their prospecting on the right clients who value and will pay for the company’s products and services. Operations and finance will realize improved productivity in servicing only those customers who are reasonable in their demands for service.  No more getting beaten up on margins, “special” payment terms, or Friday afternoon rush jobs!

The bottom line is the advantage of customer profitability analysis is improved profitability and cash flow! The two ingredients necessary to grow a company faster.

Learn how to apply concepts like this in your career with CFO Coaching.  Learn More

Your CEO needs to understand each customer’s profitability and for you to be their trusted advisor. Click here to learn how you can be the best wingman with our free How to be a Wingman guide!

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Timing of Hiring Interns

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What is the timing of hiring interns for the summer? How soon should a company start looking for summer intern help?

Timing of Hiring Interns

Just yesterday, I received a call from a business associate who was making introductions for his daughter for an internship this summer. All he was doing was opening doors. He expected her to follow up. It started me to thinking about next summer’s internships for our company.

Now keep in mind we have been hiring summer interns for the past six years. Some have been outstanding and others have been just good. The difference has been how early in the process did we start recruiting. It seems that the best candidates for a summer internship get hired by April, May at the latest. That doesn’t mean you won’t find a good candidate at the last minute. There just aren’t as many talented interns looking by June.

I am always impressed by effort and initiative. The interns who hustled and started the process early often were the hardest working interns. We look for a work ethic and initiative more than smarts. Attitude goes a long way!

The phone call yesterday started me to thinking about our summer interns. We need to start scoping the projects we want to accomplish this summer. By planning our goals for the intern we can target the talent we want to recruit. It also gives us a screen process when hiring that summer intern.

Goal For Our Interns

Last year, our goal was to rewrite our wiki’s for our website. We ended up hiring three interns from University of Houston’s Wolff Center for Entrepreneurship. We received quotes to move the articles from an old site to our new one. The interns were able to do the same project for half the cost. Given time they could solve any obstacle. They impressed us!

Over the next few months, we are going to set our goals for this summer and spread the word for the talent we are looking when hiring this next summer’s interns. You should start too. The timing of hiring interns is now!

Determine which candidates are the right fit for your company by downloading the free white paper, 5 Guiding Principles For Recruiting a Star-Quality Team.

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Managing Cash Flow

Effectively managing cash flow is an issue that all businesses face, whether they have plenty of cash or are experiencing a cash crunch.  Cash is the lifeblood that fuels current operations and allows for growth, so developing a strategy to manage this most important asset is key.

Effectively Managing Cash Flow

So how do you effectively manage cash flow?  In the article “Track Money In and Out of a Company“, Jim Wilkinson suggests the following strategies:

  1. Prepare cash flow projections
  2. Manage and work your operating cycle
  3. Watch expenses carefully
  4. Use your cash wisely

The article lists specific examples of what these strategies look like and how to implement them. Click here to read more about it.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

managing cash flow
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What is a Business Model?

Entrepreneurs and businesspeople have many different definitions of what is a business model.

Business Model Definition

In the simplest form, business models are the method and strategy that a business or organization uses to operate. This includes the purpose, systems, and people that work together to add value to customers. These components can either be formal or informal. For example, large corporations have very formal purpose statements. This gives a framework to build around the systems. Ultimately, the people are the ones that put the business model into action and create value in-line with the organization’s purpose.

What is a Business Model?

So, what is a business model? First, entrepreneurs are notorious for not writing their business models down. These entrepreneurs often overextend themselves. As a result, it increases the likelihood that the company will lose sight of its mission. This is a serious danger but is not all-inclusive. Some entrepreneurs keep their business model in their heads and continue to deliver quality products. More often than not, however, entrepreneurs do not write their plans down. As a result, those plans are in jeopardy of not being fully executed. One possibility that is equally as frightening as no execution is the inability to tell the effectiveness of the plan.

An organization’s business model is bound to change and adapt. However, if it is not recorded in some way—whether in writing, pictures, or computer graphics — then it is difficult to assess whether the plan was successful or efficient. This can be detrimental to entrepreneurs, because they don’t have clear feedback to learn from in order to improve. To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

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Exit Planning

See Also:
Economic Value Added
Employee Stock Ownership Plan
Future Value
Balance Sheet
Income Statement

A Guide to Preparing an Exit Plan

Are you like many business owners? A majority of closely held and family owned businesses will change hands within the next five years. But many Business Owners may not have taken active steps to transition out of ownership. Again, if you are like many of our readers, the reasons for failing to plan may be:

  • You may have simply been too busy working in your business to be working on it – at least until now
  • You may be unsure of how to begin Exit Planning, who to use or even where to begin. Those uncertainties can be addressed today.

Exit Planning

This issue of The Exit Planning Review™ and every subsequent issue will encourage you to work on – not in – your business. Your education about the Exit Planning process begins now. Proper knowledge and preparation can possibly mean millions of dollars to you when you ultimately leave your company. Start Exit Planning today and you can help to avoid the sad (but too common) fate of TJ Construction.

Years ago, I met with Jim and Tim McCoy, two owners of a thriving construction company. What I assumed would be a business planning meeting, turned out to be a “We’re getting out of business, how do we do it?” meeting. As successful as they were, they were tired of the government regulations, changing tax codes and day-to-day grind of running a multi-million dollar company.

A sale to a third party was not an option because Tim and Jim were not willing to stay on after a sale – and they had failed to develop a strong management team, which any savvy purchaser would require as a condition of purchasing the company. Transferring ownership to a group of key employees was also out of the question. None had been groomed to take on this type of responsibility and nothing had been done to fund this type of buy out.

Both owners were too young to have business active children so their only option was to liquidate.

Jim and Tim’s highly profitable company had little worth beyond the value of its tangible assets. After the sale of those assets, dozens of the employees lost jobs, the business disappeared, and Jim and Tim left millions of dollars on the table.

Engage in an Exit Planning Process

How can you help to avoid Jim and Tim’s fate? By engaging in an Exit Planning process that you control. An Exit Planning process begins by asking yourself the questions that follow. Your Exit Plan will begin to be created as you answer each of the following questions affirmatively:

1. Do you know your exact retirement goals and what it will take – in cash – to reach them?

2. Do you know how much your business is worth today, in cash?

3. Do you know the best way to maximize the income stream generated by your ownership interest?

4. Do you know how to sell your business to a third party and pay the least possible taxes?

5. Do you know how to transfer your business to family members, co-owners, or employees while paying the least possible taxes and enjoying maximum possible financial gain?

6. Do you have a continuity plan for your business if the unexpected happens to you?

7. Do you have a plan to help secure finances for your family if the unexpected happens to you?

These questions are almost misleadingly simple to ask, but to answer them affirmatively requires thought and action on your part.

Creating and implementing your Exit Plan may be the most important business and financial event of your life. But there may be some “destroyers” that are limiting its potential value. Click here download the Top 10 Destroyers of Value to maximize the value of your company.

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Threat of New Entrants (one of Porter’s Five Forces)

See also:
Porter’s Five Forces of Competition
Supplier Power
Buyer Bargaining Power
Threat of Substitutes
Intensity of Rivalry
Complementors (Sixth Force)

Threat of New Entrants Definition

In Porters five forces, threat of new entrants refers to the threat new competitors pose to existing competitors in an industry. Therefore, a profitable industry will attract more competitors looking to achieve profits. If it is easy for these new entrants to enter the market – if entry barriers are low – then this poses a threat to the firms already competing in that market. More competition – or increased production capacity without concurrent increase in consumer demand – means less profit to go around. According to Porter’s 5 forces, threat of new entrants is one of the forces that shape the competitive structure of an industry. Thus, Porters threat of new entrants definition revolutionized the way people look at competition in an industry.

Threat of New Entrants Explanation

The threat of new entrants Porter created affects the competitive environment for the existing competitors and influences the ability of existing firms to achieve profitability. For example, a high threat of entry means new competitors are likely to be attracted to the profits of the industry and can enter the industry with ease. New competitors entering the marketplace can either threaten or decrease the market share and profitability of existing competitors and may result in changes to existing product quality or price levels. An example of the threat of new entrants porter devised exists in the graphic design industry: there are very low barriers to entry.

As new competitors flood the marketplace, have a plan to react before it impacts your business. Download the External Analysis whitepaper to gain an advantage over competitors by overcoming obstacles and preparing to react to external forces, such as it being a buyer’s market. 

A high threat of new entrance can both make an industry more competitive and decrease profit potential for existing competitors. On the other hand, a low threat of entry makes an industry less competitive and increases profit potential for the existing firms. New entrants are deterred by barriers to entry.

Barriers to Entry

Several factors determine the degree of the threat of new entrants to an industry. Furthermore, many of these factors fall into the category of barriers to entry, or entry barriers. Barriers to entry are factors or conditions in the competitive environment of an industry that make it difficult for new businesses to begin operating in that market.

Examples of Barriers to Entry

A high production-profitability threshold requirement, or economy of scale, is an entry barrier that can lower the threat of entry. Highly differentiated products or well-known brand names are both barriers to entry that can lower the threat of new entrants. Significant upfront capital investments required to start a business can lower the threat of new entrants. Whereas, high consumer switching costs are a barrier to entry. When access to distribution channels is an entry barrier – if it is difficult to gain access to these channels, the threat of entry is low. Access to favorable locations, proprietary technology, or proprietary production material inputs also increase entry barriers and decrease the threat of entry.

And of course, if the opposite is true for any of these factors, barriers to entry are low and the threat of new entrants is high. For example, no required economies of scale, standardized or commoditized products, low initial capital investment requirements, low consumer switching costs, easy access to distribution channels, and no relevant advantages due to locale or proprietary assets all indicate that entry barriers are low and the threat of entry is high.

Other factors also influence the threat of new entrants. Expected retaliation of existing competitors and the existence of relevant government subsidies or policies can discourage new entrants. While no expected retaliation and the lack of relevant government subsidies or polices can encourage new entrants.

Threat of Entry Analysis

When analyzing a given industry, all of the aforementioned factors regarding the threat of new entrants may not apply. But some, if not many, certainly will. Of the factors that do apply, some may indicate a high threat of entry and some may indicate a low threat of entry. But, the results will not always be straightforward. Therefore it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.

High Threat of Entry of New Competitors When:

  • Profitability does not require economies of scale
  • Products are undifferentiated
  • Brand names are not well-known
  • Initial capital investment is low
  • Consumer switching costs are low
  • Accessing distribution channels is easy
  • Location is not an issue
  • Proprietary technology is not an issue
  • Proprietary materials is not an issue
  • Government policy is not an issue
  • Expected retaliation of existing firms is not an issue

Threat of New Entry is Low if:

  • Profitability requires economies of scale
  • Products are differentiated
  • Brand names are well-known
  • Initial capital investment is high
  • Consumer switching costs are high
  • Accessing distribution channels is difficult
  • Location is an issue
  • Proprietary technology is an issue
  • Proprietary materials is an issue
  • Government policy is an issue
  • Expected retaliation of existing firms is an issue

Threat of New Entry of competitors Interpretation

When conducting Porter’s 5 forces industry analysis, a low threat of new entrants makes an industry more attractive and increases profit potential for the firms already competing within that industry, while a high threat of new entrants makes an industry less attractive and decreases profit potential for the firms already competing within that industry. The threat of new entrants porter’s 5 forces explained is one of the factors to consider when analyzing the structural environment of an industry. To continue to expand your analysis, download the free External Analysis whitepaper by clicking here .

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