Images_Digital_Edition_January_2019

KB BUSINESS DEVELOPMENT www.images-magazine.com 122 images JANUARY 2019 This is an edited excerpt from Characters Who Can Make Or Break Your Small Business by Michael Best. Through 39 characters, Michael covers all aspects most small business owners can expect to encounter in the life of a business from inception to disposition. It can be read linearly or used a reference book to be consulted when confronted with a particular issue. Real life examples and anecdotes presented conversationally means it’s not your average, boring business book. It is available from www. smallbusinesscharacters.com and www.amazon.co.uk . so totally cool that I’ve created this happening place.” Greg was very pleased with himself for having ‘stuck it to Nordic‘. When I asked whether he’d managed to negotiate a good price with the rock ’n’ roll customer, he said that he’d only had to give them a slightly better price than Nordic was charging. I asked whether an accountant had checked the viability of his pricing and he assured me there was no need for that because if Nordic was making a lot of money at those prices, then he would too. I had not been invited to offer business advice and when I sensed that I might be crossing a line, I refrained from sharing my immediate thoughts. Instead, I just said, “Good luck, Greg,” climbed into the car and, before even turning the key, called the office to tell our accounts receivable person to keep a close eye on Greg’s account. Six months later we received a package from a firm of trustees in bankruptcy and wrote off Greg’s bad debt of a few thousand dollars. Consulting an accountant or someone with similar expertise on something as fundamental as pricing can make your business; not doing so can break it. The vexing issue of discounting Any accountant in public practice can tell you about small business owners who make decisions on everyday business matters influenced more by what everyone else is doing rather than by the impact the decision will have on their businesses in their peculiar circumstances. For instance, a close and equally troublesome relative of pricing is discounting. It’s a strategy commonly used to boost sales for any number of reasons. Discounting can be quite useful in dealing with inventory situations such as overstocking or redundancy. Businesses run into trouble with discounting when using it as a volume-boosting strategy. Typically, small business owners don’t properly analyse their discounting schemes and, as a result, these schemes can be more harmful than helpful. Andrew’s 10% discount proposal Andrew was running one of our regional operations. With a marketing-focused masters in business administration (MBA) from a respected business faculty at a US university, he was more than equipped for the job. The lesson to be taken from this story is that if the subtlety of numbers can escape an MBA’s scrutiny, then small business owners less schooled in the intricacies of interpreting numbers should at least solicit a second opinion from an accountant or similarly qualified resource. I had gathered the staff together for a review and strategy meeting where Andrew suggested offering his customers a discount to attract more sales. I should point out that we were distributing the highest quality and highest priced products in a restricted and price-conscious market not particularly concerned with quality – quite a marketing and sales challenge. Andrew was influenced by the phenomenon we all see quite regularly, but never more so than on Boxing Day. However, discounting is not a one-size-fits-all solution. Individual market circumstances can vary greatly and therefore it cannot be assumed that an effective discounting strategy in one circumstance will be effective in another. Andrew was overlooking the fact that we operated in a restricted market with a finite number of potential customers when he proposed that offering a discount would enable him to attract more sales in his territory. My immediate question about the size of discount he had in mind and how such a discount would affect our margins, wouldn’t have surprised anyone in the room. I was aware of my ‘Margin Mike‘ nickname. “A few points won’t get anyone excited, so we’d have to offer something like 10%,” said Andrew. Everyone in the room seemed to be comfortable with a 10% discount. Considering how accustomed we are to seeing ‘40% off‘ and ‘50% off‘ signs in the shops every weekend, this wouldn’t have sounded excessive. Margin Mike then demonstrated that, given our pre-discount gross margin of The 10% discount idea made no sense once it was reduced to numbers 33%, to restore the gross margin given away by the 10% discount, we would have to increase our sales volume by 43%, ie sell 43% more product. This would only get us back to where we were in gross margin dollar terms before offering the discount. You can test the arithmetic yourself quite easily. Andrew immediately poured cold water on any possibility of finding an additional 43% of product sales in his territory. We didn’t even attempt to determine what it would take to increase the bottom line if we took the additional handling and administrative costs associated with 43% more sales into account. It wasn’t necessary. The 10% discount idea obviously made no sense once it was reduced to numbers. The moral of Andrew’s discount proposal? If you’re not a number cruncher and don’t have a number cruncher on staff, hire the services of one. See an accountant before jumping to conclusions; conclusions that could be disastrous.