In PART I of this discussion I made the argument that every business is in the information and technology business. Yes, I realize that giving some thought to that concept, everyone that focuses on that statement tries to come up with a business that can’t possibly be in the information and technology business. So, I will say this: Even the Shoeshine guy or gal is in the technology and information business, and I can prove it. But, I will leave that to the end.
Let’s just assume that you happen to be in a line of business that does produce or have access to information. What’s next? The answer is in knowing how to harness that information to gain additional revenues, decrease costs, or simply stay competitive. These days with mounting pressure from every angle its not just enough to have terabytes of information, it’s about leveraging data so that the information it provides makes you better able to make a sale, to create operating efficiency, or simply to stay ahead of the curve. You have to really look at the data that you have and extrapolate its meaning. Of course there are many ways to do this but, I typically start with two simple approaches. I look at those types of information that tells me about the environment I operate in and, secondly I look at those types of information that tell me about how well my business is doing. Some business analysts say this is the “External” and “Internal” point of view. In some cases you may hear the terms “Macro view” vs. the “Micro view”, respectively. Yet another way, is to look at information you can not control, vs. information on things you can control. So let’s take a quick look at that. Say you are in the business of automotive replacement parts. Some of the areas you might want to look at and why they are important to you are as follows:
The External Information:
(1) Look at trends of how long people are keeping their cars, or perhaps whether automobile consumers are buying or leasing vehicles.
It may not seem obvious but, during this recession owners, and businesses were holding on to their vehicles slightly longer. Partly, due to tight credit markets, but also because of high unemployment and job security issues, compounded by doubts about the automobile industry.
Why is this important? It means your sales should be going up as owners who plan to keep their auto’s longer tend to fix and repair their autos as they plan to hold on to them longer. If your sales have shown no increases, your marketing efforts are off, your pricing structure may be wrong and this is a sign management needs to pay close attention to this.
(2) Who is your competition? What is their pricing? What value added features do they have?
You can rest assured that it is very likely your customers know they have alternatives. They too are users of information. And the best way to compete is to know what your competitors are doing, and find a way to differentiate yourself from them.
What can you do? Analyze if you can offer free delivery for large orders. If you use the same suppliers, why aren’t you getting a better price? Is there a service you can offer that your competition can not? An analysis of all of these questions may lead to some action that could mean a better bottom line.
The Internal Information:
(1) What are the top 200 items purchased? What are the top 150 items with the highest profit margin?
Every business should know what their bread and butter is. Knowing how to leverage these items gives you insight in how best to manage the products and services you offer. They give you the answers you need to maximize the platform that gives you a stable base and allows you to innovate and try new things that either grow your business with additional sales or makes you more competitive.
What can you do? Try to negotiate a better price and or get a volume discount with your supplier. Pass the savings on to your customers if they make larger purchases. Offer promotions geared towards grabbing market share from competitors.
(2) What is my inventory turnover rate? What is the relationship of storage space required for the slowest moving inventory items?
Inventory is very capital intensive. In other words, it takes a lot of money to keep that inventory on the floor ready for a sale. It’s not just the cost of the products itself, but also the cost of storage, waste, breakage, theft. Inventory is also real estate intensive. The larger the product you sell the bigger the real estate you need to store that product.
What can you do? Change how you buy inventory. It might be cheaper to pay additional delivery fees than to pay high cost real estate to store items. It might be cheaper to special order large inventory items, and perhaps your clients don’t mind either, than to store slow moving, large items that do not sell quickly.
Clearly, the most profitable and successful businesses look at every angle. After many years of dealing with businesses, all too often I see management that is stuck in a rut of simply selling for a higher price than cost and simply making sure that the right product gets to the client. Of course this is a substantial challenge all on its own but, in today’s business environment it’s not enough.
Of course service industry’s can use the same methodology to analyze external and internal factors that affect their business.
It’s is very difficult for many companies to find the right type of employees that know how to analyze and prepare information. It’s even more of a challenge to find talented people that are capable of making the cause and effect type relationship analysis to solve business problems.
Business advisory services provided by qualified CPA’s is a very valuable service. Sometimes, it is the best way to bring innovation into an organization that needs to get to that next level. If you are one of those businesses, maybe we need to talk.
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