For many small business owners, there is no greater joy than that moment when they finally complete their exhaustively researched and thoughtfully compiled business plan. Every aspect of their future success has been considered and all that is left to do is put the plan in action. Yeah, right.
Reality, as we know, has little respect for our theoretical plans. Almost as soon as business starts to hit full swing, our assumptions and models seem to fall apart and we’re left reacting instead of acting – we’re just surviving instead of thriving. We return to our business plan looking for answers but are left feeling it bares no real resemblance to what we’re facing.
So, how do we avoid this fate? How do we give ourselves a framework that is robust enough to provide meaningful guidance and structure to our endeavors, while remaining flexible enough to deal with the vagaries of the real world?
The answer is, we need to start thinking lean. Lean methodology is a business practice commonly followed in the engineering and tech industry but the benefits are equally applicable to the world of brick and mortar stores and restaurants. At its core, Lean methodology respects that business is really practiced by trial and error. It’s a process of trying out new suppliers, experimenting with staffing levels, exploring different marketing opportunities and figuring out what works and what doesn’t.
For a full run down on Lean methodology and how it can be applied to small business, make sure you to check out our free 5 Week Course, Lean Retail 101.
To help you get started in a lean way, I’ve provided below a simple, lean financial health check for your business. If you’re new to small business, it will help you get started right and if you’re an old-hand looking for a fresh approach, it will give you a rubric to investigate where your business is right now and guide you towards the proactive steps you can take to improve.
Lean Financial Health Check
- Do you know who your ideal customer is?
- Do you know how to reach them?
- Do you know who your competition is?
- Do you know why they would choose you instead of your competition?
- Do you know the right numbers to track?
- Do you know how to move those numbers in the right direction?
Do you know who your ideal customer is?
Define the Demographic, Likes/Dislikes, Habits of your ideal customer, e.g. 25-35 years old, professional, enjoys punk music, works 9-8, travels via car vs. 30+ Mother, Stays At Home, Likes Crafts, Takes Children to School every day at 9am.
The more you know about your ideal customer, the better you will be able to create a ‘value-added’ customer experience.
Do you know how to reach them?
Define your channels, i.e. Mailing list, local newspaper adverts, Social Media, etc. Consider how much your spending on each channel (in terms of both money and time). And crucially ask yourself how you are measuring the impact of your efforts.
Hint: Every single small business owner in America will write ‘word of mouth’ in this category, so if you’re relying on this, you’ll want to think very hard about how you’re encouraging your customers to spread the word. Are you encouraging people to take snaps of themselves in their stores and then share on social media?
Do you know who your competition is?
No matter how singular, distinctive, and earth-shatteringly novel your small business idea is, you are going to have competition. List out all the businesses you see as your competition – this can be local shops and restaurants, online retailers, big-box retailers on the outskirts of town.
It’s always hard to know exactly how your competition is doing financially but in today’s day and age, there is a fairly easy way to find out what their customers think of them. Get on review sites like Yelp and crawl through the competitive reviews. Start taking notes of keywords and trends. You’d be amazed how quickly, you can build up a sense of what someone’s weaknesses and strengths are.
Do you know why they would choose you instead of your competition?
Ask yourself this one core question – how am I adding value to the customers’ retail or restaurant experience? At Counter Culture, we are firm believers that small business will win by competing on value, not price.
“Ask yourself this one core question – how am I adding value to the customers’ retail or restaurant experience?”
For each business type, the most appropriate value-adds are different but there are certain truisms across the board – Are you hiring more knowledgeable staff and providing a superior education about the products on offer? Are you investing more in a convenient, pleasant, and welcoming in-store environment? Are you meeting and exceeding your customers’ needs when they walk through the door?
A good way to ‘take the pulse’ of your own store is to walk through your ‘ideal customer journey’ starting outside your store or restaurant and at each stage, consider how well you are adding value.
If you already have a Yelp profile repeat the exercise you did your competitors for your own reviews – what can you learn about how your customers perceive your business?
Do you know the right numbers to track?
One of my favorite sayings in business is ‘I’m losing 5 cents on each sale but I’m making it up on volume!’
It’s amazing how many small businesses are able to attract customers en masse with great marketing and a solid product offering, only to fail because of an inability to control costs. The primary indicator of the financial health of your business is not revenue – it’s gross profit. If your suppliers raise prices and you don’t follow suit, your revenue will continue to look healthy but your bottom line won’t. Make sure you’re tracking the right numbers.
A Quick Primer on Gross Profit
- The best way to start thinking about your gross profit is to separate out your fixed and variable costs.
- Your fixed costs are those that will be leaving your business bank account every month – think: rent, utilities, loan repayments, some government fees.
- Your variable costs are those that are incurred as a result of producing and selling your product. Essentially, these costs are your ‘Cost of Goods Sold (CoGS)’.
- Once you understand the cost of bringing each product to the point of sale, you can then deduct those costs from your revenue to generate your gross profit:
- Gross Profit = Sales Revenue – Cost of Goods Sold
This absolute number is often expressed as a percentage – Gross Profit Margin.
This is calculated as: Gross Profit Margin = Revenue – CoGS/Revenue
Once you’re setup in business, there is little that a small business owner can do to dramatically impact fixed costs, so the majority of your efforts should be focused on improving your gross profit margin, i.e. decreasing your cost of goods sold (or variable costs) while increasing your sales revenue.
NOTE: For more guidelines on the numbers to track in your business, check out this excerpt from Lean Retail 101: What Are The Metrics That Matter?
Do you know how to move those numbers in the right direction?
How is your gross profit margin stacking up? The right benchmark is different for each business type, with independent restaurants enjoying considerably higher gross profit margins (circa 60%) than, for example, grocery stores, (circa 25%). It is however, vitally important that you have a goal in mind when taking action. National industry bodies, other small business owners, and local government can all provide detailed guidelines for your specific business type.
There are two key ways to drive gross profit margin in the right direction:
If you’re new to small business, do yourself a favor and start with your price point a little higher than you may feel comfortable with. It’s always easier to lower prices than it is to raise them. That being said, you have to be sensitive to the economic environment, your competition, and the supply and demand for your product, amongst other factors. If you’re already in business and you’re looking to impact your overall gross profit margin by raising prices, you’ll want to do this is a staged manner – one product line at a time. If you make a mistake and increase your prices too much, customers can get put off and your sales can drop. Remember though: ultra price-sensitive customers are more likely to find what they’re looking for at the Walmarts of this world, not their local small business. Your job is to have competitive pricing but to actually compete on the value-add, not the price.
If you’ve got into the habit of discounting – now would be a great time to take stock of your efforts. If you are discounting by just 10%, you’ll need a 25% increase in sales just to make your gross profit margin stand still. For some businesses this kind of dramatic uptick in sales is possible, so go for it. But for the rest, it’s probably hurting more than it’s helping.
“If you’re new to small business, do yourself a favor and start with your price point a little higher than you may feel comfortable with. It’s always easier to lower prices than it is to raise them.”
Decreasing your variable costs can be just as tricky as increasing the price of your product. If you reduce labor costs and produce your goods for sale more cheaply, you may end up with a lower quality product or poor customer experience. Cutting employee pay is also almost never the right answer. A happy, motivated, and properly incentivized staff is a crucial part of driving revenue. So how can we cut costs?
One key way to ensure your costs of goods are moving in the right direction is to renegotiate rates with suppliers as your volume grows. That way you’re maintaining quality, while driving down cost per item. In general, watch supplier bills like a hawk – don’t be surprised if you’re being charged for goods or services that you never received.