Zellers ISSUE 0 5 O CT O BE R 20 09

Consulting
Group
Management
focus
Outrunning the Bear:
Advice for Small Businesses in Troubled Times Build More
There is an old joke about two campers who stumble across a bear in the woods. Angered at PROFIT
being disturbed, the animal runs headlong at the campers. The campers turn and flee. The in you Business!
beast shows no sign of giving up the chase, so after a while one
camper worriedly says to his pal “I don’t think we can outrun this The Zellers Consulting
bear.” The other says, “I’m not trying to outrun the bear. I’m just Group provides consult-
trying to out-run you!”___________________________________ ing and manage me nt
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ services to a growing list
of small business clients.
Almost all markets have turned bearish lately. How should your We offer our clients cus-
small business react? Not panicking is a good start. Remember,
tomized solutions linking
however gloomy conditions may seem to you, they will be gloomy
for your competitors, too._________________________________ business information with
technology, strategy and
According to the U.S. Small Business Administration, in 2007 there execution.
were 637,100 new small businesses, 560,300 business closures
and 28,322 bankruptcies. Two-thirds of new employer firms sur- Simply put, we make
vive at least two years, 44 percent survive at least four years, and our clients:
31 percent survive at least seven years. Put another way, 33% of
small businesses will fail within two years, 56% will fail within four
and more than two out of three will fail within seven years. Accord-  More Efficient
ing to the SBA, tMany business owners believe they know their break-even point – and knowing  More Competitive
 More Profitable

Break-Even Point ...and we

Guarantee our
your Break-Even Point is important. The chart to the right shows the typical understanding of work!
the concept of Break-Even. At low sales levels, revenue is insufficient to cover the combination
of Fixed Costs and Cost of Sales expenses. You are in the Red triangle. As the Sales level in-
creases, revenue exceeds the combination of Fixed Costs (FC) and Cost of Sales (COGS) and
the company begins to gener-
ate a profit. (The Green Trian-
gle)

However, most small busi-

nesses operate within a very
narrow range of profitability –
constrained by competition and
limited resources. It can be
difficult for a small business to
expand their sales significantly
beyond the Break-Even Point
and generate excess amounts
of cash.
The numbers are similar across
industry sectors.

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 Zellers ISSUE 0 5 O CT O BE R 20 09

Consulting
Group
Management
focus
Our Expertise
Economic downturns are the business equivalent of Darwinism
– a test where only the fittest survive and prosper. Strategic Planning
Productivity
In a downturn, the primary goal is survival, especially for small businesses that lack significant
resources to help ride things out. Survival requires special attention to the operating basics - Improvement
and for any business, the most basic need is CASH! Management by
Objective
CASH is the lifeblood of every business and unfortunately, for many businesses in this economic
cycle, the availability of cash remains very tight and with sales constrained by the recession, Sales Team
expenses must be trimmed in order to preserve cash. Before the collapse of the credit markets, Management
rising property values and easy credit gave the owners of even marginal businesses options and
flexibility when managing the cash flow of their businesses. Even if the banks turned them Business
down, it was possible to support the business using retirement savings or the equity from their Development
homes. As we all know, those days are gone and as a result, Cash Management has taken on a
completely new urgency.
Gross Margin
Improvement
Businesses fail because of the lack of cash, not the lack of Process
profits. Forget profits for the moment and focus on cash. Re-Engineering
Leadership Coaching
Company Branding
Where does the Cash come from? Product Marketing
Most businesses start out with the owner’s money. In some cases, that Management
money is supplemented with money from investors – either as an Training &
exchange of equity or as a loan. In other cases, the owner pledges busi- Development
ness or personal assets and borrows money from a local bank, credit
union or insurance company. Vendors can also be a source of capital – Lead Generation
usually in the form of trade credit on purchases. Program Creation
Inventory
Of course, the largest source of cash is… Sales! Management &
Re-Alignment
Performance-Based
Most of the cash you generate goes to pay for the products the business sells - including
purchases of inventory, the labor to build things, and the commissions paid to salespeople. Compensation Plans
There are countless combinations and typically, these costs are called “Direct Costs” or “Cost of
Goods Sold”. Direct Costs are costs that exist because you have made a sale. (See the dotted
Black line in the chart above)
Coming in
Where does the Cash go? future issues:

Where’s the Cash?

In addition to the “Cost of Goods Sold” expenses, the business has numerous “Indirect” or
“Fixed Costs” including rent, utilities, salaries and other supplies and services. These bills are Fundamentals of
what it takes to keep the doors open – whether you have sales or not. (See the solid Red line Inventory
in the chart above)
Management
The combination of Direct and Indirect Costs equal your total costs. (The solid Red line overlaid
with the dotted Black line in the chart above) Every month, these bills come due and cash must Direct Mail Marketing
be withdrawn to pay them. Basics

Page 2 of 3
 Zellers ISSUE 0 5 O CT O BE R 20 09

Consulting
Group
Management
focus
Many business owners look at their Income Statement each From the
month, trace down to the bottom and expect to see that much desk of
money in the bank. Ted Zellers
Surprise! “To truly become a high
performing company with

The Income Statement and Balance Sheet greater profitability, you

must plan for it, evaluate
The Income Statement only told us part of the story. We need the Balance Sheet to see the f i n an c i a l p e r f o r m a n ce
rest. In addition to the expenses reported on the Income Statement, there are also Balance and take action to ad-
Sheet transactions that affect your supply of cash. The principal payments on notes are not dress problems as they
an expense but require cash nevertheless (See the dotted Blue line in the chart below). arise.
Funding any increases in Inventory or Accounts Receivable requires cash.
To do this, you must
The Cash Flow Break-Even Point is always higher than the have accurate and timely
Operating Break-Even Point. (See the dotted Blue line in the chart below) financial i n f o r m a t i o n,
which you understand
Once your cash baseline is understood, identify every opportunity to lower that baseline or and use to measure the
make it more flexible. Identifying opportunities does not mean acting on them immediately, as p e rf ormance of y our
many of them will involve a trade-off between cash today and profit tomorrow. Nevertheless, business.”
identifying opportunities means you will be ready to take the pragmatic steps needed to keep
the business running during its darkest
days. Think also about reserves of cash
the business can draw upon. Identify For those of us in the
what the business needs to do to make business of helping other
the cash that will keep it alive for a businesses survive and
month, 3 months, 6 months, and a prosper, the greatest chal-
year. If things get desperate, you may lenge may be initiating this
need to shift timescales to weeks or even discussion with our clients.
days.
At the Zellers Consulting
That advice may seem obvious, but even
Group, we believe making
big businesses can struggle with this: the
American automobile industry with its clients more efficient and
high fixed costs and over-reliance on competitive is our primary
achieving a high volume of unit sales is a goal.
very relevant example. _
_ _ _ _ _ _ _ _ _ _ _ We can assist virtually any
What does your business need to do client with a careful and
to survive? objective evaluation of their
direction and performance –
Manage your level of Cash!
and if warranted – provide
However, don’t spend so long playing with numbers that you forget to actually run the business. them with the expertise to
Know what the cash targets are and keep them up to date as time passes and circumstances implement marketing, sales
change. and operational improve-
ments that will make their
business more efficient and
more competitive.
www.zellersconsultinggroup.com
Questions or comments? Email us at: tzellers@zellersconsultinggroup.com or call 248-410-6882 Let’s make sure that our
© 2009 Zellers Consulting Group. All rights reserved. businesses (and our cli-
ents) stay strong and
Page 3 of 3 healthy.