Zellers Consulting Group

Outrunning the Bear:

ISSUE 0 5

O CT O BE R 20 09

Management
focus
Build More

Advice for Small Businesses in Troubled Times
There is an old joke about two campers who stumble across a bear in the woods. Angered at being disturbed, the animal runs headlong at the campers. The campers turn and flee. The beast shows no sign of giving up the chase, so after a while one camper worriedly says to his pal “I don’t think we can outrun this bear.” The other says, “I’m not trying to outrun the bear. I’m just trying to out-run you!”___________________________________ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Almost all markets have turned bearish lately. How should your small business react? Not panicking is a good start. Remember, however gloomy conditions may seem to you, they will be gloomy for your competitors, too._________________________________ According to the U.S. Small Business Administration, in 2007 there were 637,100 new small businesses, 560,300 business closures and 28,322 bankruptcies. Two-thirds of new employer firms survive at least two years, 44 percent survive at least four years, and 31 percent survive at least seven years. Put another way, 33% of small businesses will fail within two years, 56% will fail within four and more than two out of three will fail within seven years. According to the SBA, tMany business owners believe they know their break-even point – and knowing

PROFIT
in you Business!
The Zellers Consulting Group provides consulting and manage me nt services to a growing list of small business clients. We offer our clients customized solutions linking business information with technology, strategy and execution. Simply put, we make our clients:

  

More Efficient More Competitive More Profitable

Break-Even Point
your Break-Even Point is important. The chart to the right shows the typical understanding of the concept of Break-Even. At low sales levels, revenue is insufficient to cover the combination of Fixed Costs and Cost of Sales expenses. You are in the Red triangle. As the Sales level increases, revenue exceeds the combination of Fixed Costs (FC) and Cost of Sales (COGS) and the company begins to generate a profit. (The Green Triangle) However, most small businesses operate within a very narrow range of profitability – constrained by competition and limited resources. It can be difficult for a small business to expand their sales significantly beyond the Break-Even Point and generate excess amounts of cash. The numbers are similar across industry sectors.

...and we

Guarantee our work!

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Zellers Consulting Group

ISSUE 0 5

O CT O BE R 20 09

Management focus
Our Expertise
Strategic Planning Productivity Improvement Management by Objective Sales Team Management Business Development Gross Margin Improvement Process Re-Engineering Leadership Coaching

Economic downturns are the business equivalent of Darwinism – a test where only the fittest survive and prosper.
In a downturn, the primary goal is survival, especially for small businesses that lack significant resources to help ride things out. Survival requires special attention to the operating basics and for any business, the most basic need is CASH! CASH is the lifeblood of every business and unfortunately, for many businesses in this economic cycle, the availability of cash remains very tight and with sales constrained by the recession, expenses must be trimmed in order to preserve cash. Before the collapse of the credit markets, rising property values and easy credit gave the owners of even marginal businesses options and flexibility when managing the cash flow of their businesses. Even if the banks turned them down, it was possible to support the business using retirement savings or the equity from their homes. As we all know, those days are gone and as a result, Cash Management has taken on a completely new urgency.

Businesses fail because of the lack of cash, not the lack of profits. Forget profits for the moment and focus on cash.

Where does the Cash come from?
Most businesses start out with the owner’s money. In some cases, that money is supplemented with money from investors – either as an exchange of equity or as a loan. In other cases, the owner pledges business or personal assets and borrows money from a local bank, credit union or insurance company. Vendors can also be a source of capital – usually in the form of trade credit on purchases.

Company Branding Product Marketing Management Training & Development Lead Generation Program Creation Inventory Management & Re-Alignment Performance-Based Compensation Plans

Of course, the largest source of cash is… Sales!
Most of the cash you generate goes to pay for the products the business sells - including purchases of inventory, the labor to build things, and the commissions paid to salespeople. There are countless combinations and typically, these costs are called “Direct Costs” or “Cost of Goods Sold”. Direct Costs are costs that exist because you have made a sale. (See the dotted Black line in the chart above)

Where does the Cash go?
In addition to the “Cost of Goods Sold” expenses, the business has numerous “Indirect” or “Fixed Costs” including rent, utilities, salaries and other supplies and services. These bills are what it takes to keep the doors open – whether you have sales or not. (See the solid Red line in the chart above) The combination of Direct and Indirect Costs equal your total costs. (The solid Red line overlaid with the dotted Black line in the chart above) Every month, these bills come due and cash must be withdrawn to pay them.

Coming in future issues:
Where’s the Cash? Fundamentals of Inventory Management Direct Mail Marketing Basics
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Zellers Consulting Group

ISSUE 0 5

O CT O BE R 20 09

Management focus
From the desk of Ted Zellers
“To truly become a high performing company with greater profitability, you must plan for it, evaluate f i n an c i a l p e r f o r m a n ce and take action to address problems as they arise. To do this, you must have accurate and timely financial i n f o r m a t i o n, which you understand and use to measure the p e rf ormance of y our business.”

Many business owners look at their Income Statement each month, trace down to the bottom and expect to see that much money in the bank.

Surprise!

The Income Statement and Balance Sheet
The Income Statement only told us part of the story. We need the Balance Sheet to see the rest. In addition to the expenses reported on the Income Statement, there are also Balance Sheet transactions that affect your supply of cash. The principal payments on notes are not an expense but require cash nevertheless (See the dotted Blue line in the chart below). Funding any increases in Inventory or Accounts Receivable requires cash.

The Cash Flow Break-Even Point is always higher than the Operating Break-Even Point. (See the dotted Blue line in the chart below)
Once your cash baseline is understood, identify every opportunity to lower that baseline or make it more flexible. Identifying opportunities does not mean acting on them immediately, as many of them will involve a trade-off between cash today and profit tomorrow. Nevertheless, identifying opportunities means you will be ready to take the pragmatic steps needed to keep the business running during its darkest days. Think also about reserves of cash the business can draw upon. Identify what the business needs to do to make the cash that will keep it alive for a month, 3 months, 6 months, and a year. If things get desperate, you may need to shift timescales to weeks or even days. That advice may seem obvious, but even big businesses can struggle with this: the American automobile industry with its high fixed costs and over-reliance on achieving a high volume of unit sales is a very relevant example. _ _ _ _ _ _ _ _ _ _ _ _ What does your business need to do to survive? Manage your level of Cash! However, don’t spend so long playing with numbers that you forget to actually run the business. Know what the cash targets are and keep them up to date as time passes and circumstances change.

For those of us in the business of helping other businesses survive and prosper, the greatest challenge may be initiating this discussion with our clients. At the Zellers Consulting Group, we believe making clients more efficient and competitive is our primary goal. We can assist virtually any client with a careful and objective evaluation of their direction and performance – and if warranted – provide them with the expertise to implement marketing, sales and operational improvements that will make their business more efficient and more competitive. Let’s make sure that our businesses (and our clients) stay strong and healthy.

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Questions or comments? Email us at: tzellers@zellersconsultinggroup.com or call

248-410-6882
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