4 Levers Control All the Cash in Your Business– All You Have To Do Is Pull
I grew up being among the first generation of video game players. To be honest, I still dabble with them when I’m bored. The evolution of the games has been amazing to see. But what I have not enjoyed is the evolution of the controllers. What started as a knob that I could rotate to move a cursor up and down the screen (Pong), has become an assembly of buttons, triggers, and joysticks (PS4) that I rarely know how to operate correctly. It’s overwhelming to try and figure out the thousands of combinations you have to instantly create to be successful in playing a video game today.
In fact, my most humbling experience was my first and only attempt at online gaming. You should have seen the confidence I had after never losing a football game in the Madden series on the Pro level. At least it wasn’t the Rookie level. I entered the world of online gaming and was quickly introduced to my sub-par skills by every 10-12 year old in the country. There were colossal losses; many of which I failed to score a single point. If this wasn’t humbling enough; young people have a really tight trash talking game as well. I’ve never been cussed and demeaned like that before. I was called everything from “old” to…. well let’s not go down that path. My only comeback I could muster was, “Put your mom on the phone.” After that experience, I set down my headset forever and returned to playing on the computer that let me win once in awhile, without the insults.
I look at the skill level attained by the young gamers today and instantly make a connection to small business owners. They have honed a craft and learned to instinctively manipulate their controllers to achieve the best results. They squeeze the trigger, move the joystick, then press a button to move through a scenario to capture a reward or increase in their game level. Not unlike small business owners making price adjustments, negotiating with vendors, reducing expenses to increase the amount of money they are making. The small business owner has it a bit easier though. There are only four levers that can be pulled. No matter how you describe the action a small business owner takes, they can be placed into one of these four categories.
1. Increase sales
This one is pretty easy to understand. If you want to increase the amount of money you make, just sell more. The real problem is this may be the hardest thing to do in your company. Gaining market share is hard and takes a while to develop. Some things you could try are to find complimentary items your clients are purchasing elsewhere, but could get from you. This way you aren’t just trying to find new customers, you are finding a way to allow you current customers to spend more money with you. Another way to increase sales is to introduce new items that require your current customers to purchase more frequently. If they already like trading with your business, give them other reasons to come in.
2. Increase price
Another simple one to understand. Some people think that increasing price and increasing sales are the same. Not necessarily. You can increase your price and have the same revenue volume, you just make more money per sale. Starbucks is great at this. Every few months, they add a few cents to the price of some of their products. You probably don’t even notice because of the oddity of their prices. You just know that a “Grande” is about $5. Some businesses may not have this option and believe that the market is price sensitive. If this is the case in your business, then look at the industry average in gross profit margin percentage and compare it to yours. If you are below the industry average, it is time to raise your prices.
3. Buy Your Inventory Better
This is the lever that is often overlooked as small business owners are hesitant to try and negotiate their own purchases. Any improvement in this area has a direct impact in the bottom line. If you can hold your prices, sale volume, and expenses the same, the savings in buying your inventory better is yours to keep. It never hurts to ask and every dollar they concede it a dollar you still have.
4. Cut operating expenses
Most small business owners start here. They try to cut their way out of a cash flow problem. I agree that expense control is necessary, but you have to ensure you are not cutting expenses that contribute to you sales. For example, during the downturn of 2008-2009, I experienced numerous bar/restaurants closing their doors. It was so evident, that I could predict which ones would close next. My indicator was the point in time when they stopped spending money on entertainment. When a bar operator stops investing on live bands, karaoke, trivia night, etc., they remove the activities that drive traffic to their location. The result is less sales, less cash flow, and closure. When cutting expenses, make sure they are not connected to your success or ability to serve your customers.
There you have it. Four levers that control the entire game of small business. As a small business operator, you can hone your skill by learning the lever to pull at the right time. Much like the young video gamer, the more time you spend understanding what happens when you pull the lever, the more successful you will become. Take some time to study your craft and level up your cash flow.