How To Evaluate Your Business
Last week I had a meeting with a man I admire very much as a very smart business manager. I met with him for breakfast and picked his brain on some of the keys to starting your own business and ensuring an existing business stays in business. He gave me some great tips on how to evaluate your business. This blog is the summary of what I learned.
Keys To Survival For Any Business
1. Ensure No Customer Is More Than 15% Of Your Sales
By ensuring none of your customers is more than 15% of your sales this ensures that no one custom can cause your business to go bankrupt. If you have one large customer of 15% or more and they either switch suppliers or go bankrupt that would mean you would lose 15% or more of your sales. Most business models can not sustain an immediate loss of sales of 15% or higher, without running into liquidity problems.
2. Understand Your Overhead
Overhead is one of the main reasons businesses fail. Simply put they have too many fixed costs for the revenue that is being generated. Overhead being ongoing business expenses that do not increase or decrease as a result of an increase or decrease in sales. These costs include administration, machine maintenance, interest payments, rent etc. Variable costs can be cut when times are tough to ensure a business survives but overhead can not be quickly cut. This means when starting your business the lower overhead you can operate with the better. His advice was you need to scale the overhead appropriately to the size of the business.
3. Minimums Of Three
Any business should always be operating in a minimum of 3 different segments, industries and geographic locations. This ensures that if any particular segment, industry or geographic area turns south it will not sink your company. If on the other hand your company only services 1 or 2 segments, industries or geographic areas take a severe economic down turn it could very easily result in your business failing. Similarly have a minimum of 3 points of difference for each of its products. Again this will ensure that if you lose one of these three points of difference as a result of action from your competition your product will still be viable in the market. If on the the other hand your products only have one point of difference and your competition develops a products that has the same benefit or even a superior benefit then your product will no longer be viable in the market place and your sales will dry up.
4. Understanding How Many People Are Willing To Pay For Your Product/Service
This is critical because it lets you know the potential for your business model. It also helps sets a ceiling for your overhead. By knowing how much revenue your business model can generate all you need to do is subtract your margins and this gives the the maximum overheard you can ever have to have a long-term viable business.
5. Embrace Change And Be Willing To Learn
From his experience he has found the most common reason businesses fail is because they are not willing to change or learn. That could be anything from their business plan to they way they operate. The idea is successful businesses are always changing and improving with the market, their customers and the environment
Another very smart piece of advice he gave me was to review my business plan every 6 months and to keep it to one page. He suggested that all it really needs to include is
1. Who your customers are
2. What your margins are
3. What your overhead is
4. What your value proposition is
5. What your competitive strengths are
I thought this was very insightful as well.
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My name is Chris R. Keller. I work at Profitworks Small Business Services helping various B2B small businesses in Waterloo and Kitchener Ontario generate new customers. If you are interested in generating new customers for your B2B small businesses enter your email in the box provided below and click the "Send Me Free Updates" button.
Hopefully this article on how to evaluate your business has been as interesting and helpful. I know the discussion I had with my mentor was very helpful to me.
