Over the past seven weeks, I’ve worked through the key contributors to business growth. Today I’m now going to show you what happens in a business when you have a Business Plan and you set some goals around your KPIs (those 4-5 key drivers that will help you improve profit and cashflow). What I’m actually showing you is the 7 Ways to Grow Your Business in action.
This case study I’m about to show you is based on an electrical contracting company. It took them a little over a year to get the improvement in their business profitability that you’ll see shortly. Of course, it all started with a Business Planning session, culminating in their one page Business Plan.
We identified three Key Performance Indicators that we had to improve:
1.Conversion rate of prospects to customers.
2.Average transaction value.
3.Cost of Goods sold or variable costs as a % of sales.
And of course we knew they would need to spend some money to get the above improvements, so we knew their overheads would go up.
The first driver we worked on was the conversion rate.
The owner was doing most of the quoting and the conversion rate was very poor at roughly 50%. We put a system in place, with follow up protocols. We also split the quoting in two. The owner took care of the residential building quotes and a senior electrician was allocated the maintenance quotes. We put reporting in place and we watched the conversion rate increase, all the way up to around 75%. Customers hadn’t been coming across the line because they weren’t systematically being followed up.
The next driver we worked on was average transaction value.
On average, average transaction value was lifted around 5% to $1,638. A better pricing system identified a number of service jobs that were being seriously under-priced.
The third driver we worked on was COGS.
One of the big drivers we focused in on was the cost of rework in housing jobs, mainly in the form of mistakes and therefore wasted labour time. Our client worked on two major quality control systems, one that had to be signed off at the pre-wire stage and the final one at the fit-off stage. These new systems were very detailed (right down to, for example, the cleaning of light cords for pendant style lighting). This involved quite a bit of change management. Teams had to be trained, so this is when the rubber hits the road. Remember that definition of insanity?
To put all of this in place, our clients had to increase their overheads.
They spent a little on us, preparing their Business Plan, and they came on board for accountability coaching. They spent quite a bit on team training and allocated more administration resources to ensure the conversion rate stayed up. Their overheads went up by $35k.
So, what was the outcome of this effort and change?
Quite considerable – a new profit of $226,891.
It’s important to understand that these improvements didn’t just affect profit and cash in the bank, they will ultimately have an impact on the value of the business. See that I’ve put a very basic valuation multiplier of 3 times the profit in this calculator. This is not actually how we would value the business, it’s just a very rough guide and it’s there to prove a point.
When you improve the profits in your business, you improve the value of the business. Most of us in this room will one day sell our businesses, so when we spend time and energy improving our business the positive impact is much greater than you first think.
Can you all now see the link between the 7 Ways to Grow Your Business and the impact on your business profit and value? By the way, we can run through this calculator with you at a planning session.
To see this in action, head across to our Videos page and look up the Growth Equation presentation. Guaranteed to be worth your five minutes seeing how this works and more importantly, how your business could benefit!