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2008 Issue 11
Handling Customers and
Suppliers Through A Downturn
Break-Even Analysis: A Simple
High-Value Tool For Business Owners
Don't Become An IT Disaster
Statistic
7 Tips For Getting Your Email
Newsletter Delivered And Read
 
Handling Customers and Suppliers Through A
Downturn
The global credit crunch has hit the economy
hard making it an anxious time for small
business owners. You may not be able to
recession-proof your business entirely but there
are a number of actions you can take to improve
your chances of weathering the downturn in
business activity and coming out the other side.
Among the most important is how you continue to
relate to the people you rely on to stay in
business − your customers and your suppliers.
Customers
With consumers cutting back their spending
level, encouraging existing customers to
continue dealing with you is a smart move.
During a downturn they may be facing financial
challenges of their own so, first up, consider
if there are special terms or value-adds you can
offer that will make it easier for them to buy
from you during this time. On the other hand,
this is also the time to review customer
profitability and ‘fire’ those who aren’t
showing a return commensurate with the effort
you are putting into servicing them.
Collecting what’s owed to you within a
reasonable period can present a real challenge
during an economic downturn. Send your initial
invoices with a pre-addressed and stamped
remittance envelope to encourage prompt reply.
Use the phone to chase accounts as they go
overdue − a diplomatic telephone call is a lot
harder to ignore than an impersonal reminder
statement that turns up in the mail. Changes in
the billing cycle can improve matters − billing
a quarter of your customers every week rather
than billing everyone at the end of the month
can even out the flow of funds coming back into
the business.
While it’s tempting to accept any business in
slow times, a high risk customer can end up
costing you money. Run a credit check before
accepting new accounts and ensure the customer
understands your credit terms. Review your
credit terms to see if they are in line with the
industry average − maybe they need tightening up
to improve cash flow. Reducing the credit period
may lose you some customers, but this might be
compensated for by the majority paying sooner.
Often, the first cost to be cut in a downturn is
the marketing budget. Consider, though, sales
only follow marketing. Monitor the effectiveness
and profitability of your marketing campaigns
carefully and only continue the most effective.
Reduce the size of your ads so you can run more
without increasing your total cost. Introduce a
referrals program – use low cost communication
tools like email, postcards or personal phone
calls to let customers know you are interested
in receiving referrals from them and what reward
they will win for any profitable business they
send your way.
Another temptation is to decrease prices. While
it may be strategic to offer discounts or
special deals to especially valued customers if
that’s what it will take to hold them, cutting
prices to all and sundry will really cut into
your margin. Run your figures − will the
consequent fall in profit be more than
compensated for by the expected increase in
sales volume? Try improving the service on offer
to the customer or around the product − this can
add value without any significant increase in
costs.
Suppliers and the supply chain
Most businesses are both suppliers and customers
at the same time. When demand slackens your
suppliers will be sharing the hurt. Just as you
may be prepared to offer discounts and deals to
good customers, so the suppliers you have a good
relationship with may be prepared to renegotiate
prices with you now. Agreement to pay key
suppliers promptly or on the due date by direct
debit should win a discounted price.
In a downturn, the last thing you want is to be
stuck with shelves of unsellable inventory. If
you don’t have a stock management system, this
is the time to implement one that can predict
your minimum inventory needs and the correct
time to order them in. Liquidate deteriorated or
obsolete items in inventory.
Rationalize your supply chain by aggregating
purchases so that you aren’t buying the same
item from multiple suppliers − it is inefficient
and time consuming and also limits your
negotiating leverage. There’s a caveat though −
select your suppliers carefully: if they go
under, you don’t want to be dragged down with
them. If they can’t make their production quotas
you may miss out on receiving supplies.
Downturns don’t last forever and businesses that
make the right moves to protect themselves will
come through. Consult a business advisor or your
accountant to get a clear view of your situation
and advice on what tactics you can take to
protect your business.
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Break-Even Analysis: A Simple High-Value
Tool For Business Owners
One of the trickiest aspects of bringing a new
product to market is to estimate the total cost
involved in its production. Cost of production
effects margin and margin determines how many
units must be sold to make a profit. If the
number of units sold can’t provide sufficient
margin at a market acceptable price, then, no
matter how good the product is, producing it
will result in a loss for the business. The
nexus between cost of production, price and
units that need to be sold to make a profit, is
called the ‘break-even point’.
Break-even analysis is one of the most important
financial tools you can use to make better
business decisions.
How break-even analysis works
A break-even analysis is a simple way to
determine how much of a product must be sold (at
a given price) for it to earn sufficient revenue
to cover the costs of producing it.
Here's a much simplified example of how the
break-even calculation works. Say the total
costs of operating the business each month are
$10,000. Each product the company produces can
be sold for $1,000. Each product costs an
average of $800 per unit to produce, sell and
deliver. The profit contribution per unit is
therefore $200 each, so the company must sell 50
units per month to cover its operating costs
($10,000 / $200), that is, to break even. Only
after the company has sold 50 units in one month
does it begin to earn a profit of $200 per unit.
If the company figures it can’t sell that many,
then it needs to rethink its plans for
production or marketing.
For startups, performing a break-even analysis
is a critical part of the business plan.
Establishing the viability of the business
depends on having a firm idea of what sales
volume needs to be achieved to reach the
break-even point, since only after that does the
business start to make a profit. For early-stage
businesses, the figures that went into the
break-even analysis provide the baseline for
monitoring actuals against pre-start projections
to determine if the business is staying on track
to make a profit. For the mature business,
break-even analysis can provide insight about
product profitability.
Using break-even analysis to determine product profitability
Many businesses produce a range of product but
don’t assign the costs of production separately
among them. They treat the electricity bill, for
example, as a monthly cost to be paid without
analyzing how much of it was incurred producing
Product A, Product B or Product C, even though
one could be using a substantial portion and
another barely any. Analyzing costs down to the
specific proportion involved in the production
of each product allows for a very precise
break-even analysis on a product-by-product
basis. Some products, as it turns out, could
actually be making only insignificant margins or
even running at a loss.
That’s valuable information to know:
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It could be a good move to discontinue
loss-making products and invest the time and
money on the more profitable ones or a new
product entirely
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Alternatively, it could be the prompt to look at
improving marketing to sell more, or,
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Increase the price to improve the margin (it’s
surprising how just a small increase in price
can snowball into a good profit on volume
sales), or,
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Try lowering the break-even point. One way to do
this is by lowering the cost of goods sold, for
instance by changing to a less expensive
supplier, improving production efficiency or
managing inventory more effectively.
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Don’t make any changes that could decrease
sales, like reducing product quality or the
customer service level associated with it
Inevitably in business, expenses tend to creep
up and sales decline as a product moves towards
the end of its lifecycle so the break-even point
may increase beyond what sales are covering.
Break-even analysis isn’t a report available
from most accounting software but it is an
important analysis for you to have and
understand. Ask your accountant to run one for
you on a six monthly or annual basis to keep
abreast of just how profitable each of your
product lines really is. Knowing the true
break-even point for each product provides a
clear picture of just how much profit each is
contributing to your bottom line.
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Don't Become An IT Disaster Statistic
Keeping the computers in your business, and the
data on them, safe is a vital job that you need
to be on top of at all times. Information
Technology (IT) has become so integrated into
business processes that the loss of hardware,
software or data can raise serious issues.
Replacing lost data can wipe out a lot of time
that would have been better put towards
production and selling. If you can’t issue
invoices for a period because you’ve lost your
accounts data it could seriously jeopardize your
cash flow. Yet surveys of SMEs suggest owners
are notably deficient in taking these risks
seriously.
How well are you protected against these common
IT hazards?
Virus attack and hacking
There are myriad viruses around with new ones
being created every day and spread worldwide
through the internet. It is inevitable that a
computer not protected by adequate virus
protection will become infected. Hackers can be
prevented from breaking in to your computer by
use of a firewall. Sign up for a comprehensive
software solution that covers viruses, malware
and spyware and includes a firewall from a
reputable provider.
Careless, ignorant or malicious employees
The potential for harm from employees is vast,
from accidental deletion of data, to virus
infection; from surfing the Web, to deliberate
copying and stealing of company information.
There is no one infallible fix, but a layered
program that incorporates education on
acceptable use (and an acceptable use policy),
computer safety training, and use of passwords
to protect data with access on a need-to-know
basis can reduce the likelihood of occurrence.
Hijacked wireless connection
Wireless has become popular as a cheap, fast and
convenient method of connecting to the internet.
But most wireless routers, the devices used to
make the connection to the internet, are set up
to work straight out of the box, meaning anyone
within range can connect via it. Routers are
only secure if they are encrypted with a
password known only to the employees authorized
to use the connection.
Damaged software
Hackers are continually searching out
vulnerabilities in software programs that will
allow them to tamper with how the program works.
As suppliers become aware of these they release
updates to restore security. Regularly check for
and install updates to keep your applications
working as they should.
Power failure
Power spikes and sags as well as straight out
power failure can lead to data corruption.
Install a UPS (Uninterruptible Power Supply) to
protect your computer from power problems and
give you time to shut it down without losing
information in the event of a power outage.
Identity and data theft
Erasing information from a computer is not as
simple as dragging files into the trash bin and
then emptying it. The data in those deleted
files, which may mean trade secrets,
intellectual property, customer records and
sensitive information like bank accounts,
strategic plans, etc, is still present on the
hard drive until it is overwritten by new data.
Decommissioned computers can still provide
access to ‘deleted’ information unless the drive
is thoroughly cleansed with a special software
tool for the purpose.
Data loss
If your office burnt down at the weekend, would
it mean the loss of your only copy of vital
information such as customer lists, taxation
records, accounts, personnel records? Stay safe
by backing up regularly and storing the data
offsite. The method you use will depend on the
amount of data and the frequency you do your
backup − it can be as simple as burning a CD of
data every day and taking it home or arranging
to have a backup done automatically over the
internet periodically.
A recent Symantec survey of European businesses
found lapses in security across these areas was
all too common, so it’s not surprising that 17%
of the respondents had experienced a recent
security breach resulting in tangible loss of
business, with nearly one in 10 citing a
monetary loss as well. Don’t become an IT
disaster statistic.
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7 Tips For Getting Your Email Newsletter
Delivered and Read
A lot of things need to come together to create
a great email newsletter, including well written
content, attractive formatting and an accurate
match of the content to the interests of your
target audience. But sometimes even a great
newsletter ends up the victim of the
subscriber’s Delete button before it even gets
opened. Here’s how you can improve the chances
of your subscribers actually opening and reading
your e-newsletter.
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Avoid the spam filters:
ISPs use rigorous spam protection mechanisms to
trap and delete suspect email before it gets
into their customer’s inboxes. To make sure your
emails don’t get filtered out as spam avoid
overdoing ‘come on’ words such as ‘free’, ‘$$$’,
‘save’, ‘discount’, etc. in both the subject
line and content of your email. Also, ISPs will
blacklist you if you do not remove any invalid
email addresses they inform you of. If that
happens, even messages to legitimate addresses
may be blocked and that could include things
like order confirmations as well as your
e-newsletter.
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Encourage subscribers to whitelist you:
Spam filters that come with email clients can
create a whitelist of addresses from which mail
is always acceptable (safe senders). Subscribers
can be coaxed to put in the effort of
whitelisting you in a number of ways:
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On your order confirmation page suggest that
they whitelist you to ensure they receive order
and shipping information
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Run competitions that necessitate them receiving
your emails to participate
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Near the suggestion that they whitelist you,
provide a link to ‘How to whitelist’ information
covering the most popular email clients
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Include your company name in the ‘From’
field: Don’t get mistaken for an organization the
subscriber has no interest in or that they don’t
recognize and might be wary about opening mail
from.
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Provide an interesting preview:
Popular email clients such as MS Outlook can be
set to display the top few lines of a selected
email in the Inbox. Always have some interesting
content at the very top of your email so that
this is what displays in the preview view. If it
sounds interesting enough it will encourage the
subscriber to open up the email and continue on
reading.
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Use the subject line to communicate value:
Your subject line is of prime importance in
determining if the reader will open the email or
delete it. Keep it short but attention
grabbing. Offer a benefit from reading the
newsletter rather than a product spiel −
Irresistible spa packages... Bali from $149.
‘How to’ article titles, tips and real news all
make good subject line copy. Avoid using CAPS
and exclamation marks that devalue the integrity
of the message.
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Make it personal:
If your CRM system allows for it, personalize
your email by greeting subscribers with their
name. Starting your email in this personal way
to suggest a relationship can increase both the
read and click-through rates of your
subscribers.
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Make it easy for subscribers to change
address:
People do change email addresses. When they do,
make it easy for them to change it in your
subscriber list. A simple method is to place, on
the page that allows readers to unsubscribe,
another field where they can subscribe to a new
address. Include a link to this page in the
newsletter clearly identified as ‘Change email
address’.
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