A survey conducted by American Express in August indicated that almost half of small business owners believed the current economic situation was negatively affecting their profits.
And nearly one in five of these business owners believed that they were at risk of going out of business because of the overall declining economic climate.
And this survey was conducted more than a month before the emotions surrounding the $700 billion "rescue plan" and before the severe Wall Street crash in October.
Professor Ed Hess of the Darden School of Business at the University of Virginia recently said, "Nothing is more stressful for a small business owner than talk of economic catastrophe. You start thinking about everything hanging in the balance, and if you aren't careful you let your worries overwhelm your common sense. Rather than taking steps to safeguard your business, you find yourself paralyzed by anxiety."
It is important for business owners to be very aware of all aspects of their business and the business environment they are operating in not only to survive but to see opportunities to get more out of the inevitable economic recovery going forward.
As a small business owner you are not only in a position to survive tough times, you are in a position to turn them to your advantage.
Small business owners have advantage over larger companies: the ability to quickly respond to changing economic conditions and to quickly change the way they are doing business from aspects such as marketing methods, introducing new products and services, modified pricing offers, team motivation and asking for their input and support and focused customer service of existing customers.
Will this be easy? No. Can the poor economy be used as a scapegoat for poor business performance? No. Will this require a positive attitude, a belief in yourself and the ability to avoid negative people? Yes. Will this be hard work and require extra hours at the office? Yes. Will this require new creativity in how you run your business? Yes. Will you need to turn to others who have different experiences than you have in running businesses? Yes.
During difficult economic conditions, and particularly with tight credit conditions, cash flow becomes even more critical to grow a business or, at a minimum, to maintain a business's performance and be positively positioned when the recovery begins. And cashflow is primarily driven by profitability; however, it is important to understand that profit is not something that you can just get more of.
What you can do is influence what the profit line will be by focusing on and improving the five variables that contribute towards the profitability of the business. And these five variables apply to every business, of every size, and in every category of industry whether it is a manufacturing business, a retail business or a service business.
According to ActionCOACH founder and CEO Brad Sugars, there are five variables that generate profit. This process of increasing profits is called "the five ways."
As a Profitability Model:
It is important to understand that Profitability can be impacted by improving the performance of any one or all of the five variables: Leads, Conversion Rate, Number of Transactions, Average $ Sale per transaction, Expense Margin. The Number of Customers, Total Revenue and Profitability are only outcomes of the five variables.
Therefore, it requires focusing on the '5 ways to increase your profitability in tough economic times' as the actionable drivers to change profitability rather than the non-actionable statement, "I want more profits."
As a starting point to improve the performance of the five variables, you must know what your current performance is for each variable. If you don't know your current performance level, you will not know what might lead to improved profitability and where to put continuing operating emphasis as you go forward.
The following are some tactics to improve your five variables immediately. Will all of these examples apply to your business? Not necessarily, but they are common sense ideas and not rocket science. Specifically develop five tactics for each variable that you know will apply to your business and focus on making immediate changes to your business and measure the results versus your current performance.
Number of Transactions per customer:
Intently examine ALL your current costs including Cost of Goods/Sales and your Fixed Costs and determine what is not absolutely necessarily or can be realistically reduced at this time.
As an example of how this Profitability Model can impact your business: If you focus on making changes in each of the five variables with a goal of improving the performance by 5 percent in each variable, this would increase your number of Customers by 10.25 percent and your Profit by 27.5 percent!
There are more than 25.5 small businesses in the U.S. employing more than half the American work force. It's imperative in tough economic times that every one of these businesses dedicates their performance to surviving and improving profitability; this Profitability Model will help them down this path.