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Is Cost Cutting Now Costing Your Business Later?

In business and in life, there are two kinds of people. A folder or a scruncher. Pasta twirler or shoveler. A spender or a saver. Which one are you? The savers of the world (probably folders and twirlers too) tend to see everything as a cost, struggling to see potential benefits of spending now for gains later. Spenders will throw money around left, right and centre, without a purpose or plan in mind. As a business owner, it's obvious that spending it a must. But how do you know when and where to spend? The easiest way to wrap your head around the concept is to categorise your spending as either an expense, or an investment. Your aim is to be spending more on investments whilst minimizing expenses. In other words, put your hard earned cash into things that will get you a return and cut down on things that won't. An expense is a necessary cost required to run your business, which is unlikely to generate any direct sales. For instance, bulk toilet paper for your scrunching employees. An investment is a cost that you would expect some kind of return from, or ROI. I was watching the Gruen Transfer last week and panelist Russell Howcroft, the CEO of Channel 10, gave a great example of this. He explained that if the cost of an ad during footy finals was $150,000 and there are 3.5 million people watching, then that brand reaches an enormous audience for the cost of a postage stamp per viewer. Companies investing in the footy advertising would have done their homework and be expecting a much greater return on their initial investment. The most difficult aspect of spending is knowing what's a smart investment and what's unnecessary. I've put together a list of six key areas to help you get started. 1. Marketing A critical and necessary investment cost if you are trying to grow. If you can't afford to market then you shouldn't really be in business. No marketing = doors are closed for any more customers or brand awareness. Not a good equation to be writing. 2. Training and Development The development of your staff is a critical investment for all businesses. In the past, I have seen managers reluctant to up-skill an employee in case they later choose to leave. I think of it like this: how detrimental could the impact on your business be if you choose not to up-skill your team? 3. Research and Innovation Innovation is a vital link in the chain of success. It can create efficiencies in all areas of your business and give you a real edge against competitors. R & D doesn't have to be this large-scale exploration that costs millions of dollars. Channel Steve Jobs on a small-scale; things like investing in an employee's time to develop a better way of delivering products to customers. In addition, there are great government grants available to encourage this type of investment expenditure. 4. Technology It's almost impossible to ignore the time and money saving benefits of technology in 2015. Get your head out of the sand if you aren't on top of it already because investing in tech knowledge and skills is guaranteed to save you thousands. Think along the lines of database integration, using cloud storage, better video communication, even enabling employees to work from home when they need to. 5. Staff Happiness Where would we be without our staff? My team is the biggest asset of my business and I want to make sure that they are equipped with all things that make their experience at work the best it can be. This starts with premises, equipment, training, food, drink, extra pasta for the shovelers; you name it. A happy team will pay off big time so invest in them and watch your culture thrive and your business grow. 6. External Advisors No one is the master of all trades. I have an external advisor coming into our business to challenge thoughts and give their opinion on different aspects regularly. It keeps me on my toes and forces me to look at things in an alternative way. People have done this before; you don't need to stumble your way through every facet of business without a helping hand. Pay for good advice now to help you get where you want to be sooner and thank yourself in the long term because it means saving precious time and unnecessary mistakes, which is a fantastic return on investment. Don't be scared to spend money to make money! However, it's still necessary to be frugal so that when these investment opportunities do arise, you have the funds to go for it.

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Pricing By The Hour? You're Wrecking Your Business

A friend of mine told me that she was “really getting on top of her charge out fees” this year. She proudly told me what her annual income target was. I asked if that allowed for full overhead recovery, car and travel costs, travel time, office expenses, telephone, computer, tablet, entertainment, sickness etc and was it inclusive or exclusive of superannuation. After an embarrassing pause I realised her real income was in fact around 60% at best of the gross income projected and for a person of her qualifications, skill, experience and ability to deliver first class work it was ridiculously low! Single person consultancies tend to bill by the hour and even larger groups calculate a charge out rate based around hours employed. This methodology works best where the supplier is in a strong position and the buyer has little or no idea as to the real time involved – let’s look at Corporate Law firms as an example of those who benefit from this. Clients are also ignorant of how a consultant calculates a fee; “A thousand a day? ****** me they earn a fortune, how can they be worth that?” well more as to why that $1,000 is really less than $500 later on. And that scenario completely misses the point. When we buy a loaf of bread or a cake we don’t ask the baker how many hours were invested in its production before agreeing on a price, but we do look for subtle evidence of quality etc. and that is the crux of pricing by value not by cost. Pricing by Value Not by Cost Take this into your mind and really think it through because it could just change your life! Pricing is one of life’s great balancing acts but it’s also about confidence. Never boast about how good you are or criticise your competition. You don’t need to, simply demonstrate quiet professionalism and your pricing will say everything about the value and quality of your service. Spell your price out with confidence and pride. Speak value, shout quality, whisper differentiation, demonstrate results and the price simply doesn’t matter. Pricing by cost means that you determine how much a job will cost you and add a mark-up, however, this means that your client pays for your efficiency (or lack thereof) you turn yourself from a valuable resource into a commodity. As Blair Enns, author of Win Without Pitching says: “Bury the billable hour.” Every client would rather talk about the value delivered than the hours provided. Quantifying Value: There are two simple ways for a consultant to provide value to a client. Either improve revenues, or reduce costs. In order to determine which of these your consultancy will provide (and implicitly price by value) you need to get to know and understand your client’s business, their market position and some basic facts about their customer value. Two simple and common measures are: The lifetime value (LTV) of customers for your client The client’s cost of customer acquisition (COCA) It is vital that you understand the LTV & COCS  of your clients target customers because it ensures that their marketing spend is a commensurate amount to acquire that customer. For example, a bespoke jeweller could presumably invest in a much higher COCA than a costume jewellery retailer. The LTV becomes increasingly important if your client is contemplating a future exit strategy. Asking these questions and obtaining this data will help you determine how much value, in the form of revenue and positioning the quality of your work will contribute and thus the fee you charge. Of course asking these questions of your client differentiates you and the detailed approach underlines your value proposition. Finally irrespective of your business being a one person show or a 100 person show do not allow yourself to be judged on or compared to $(x) per hour. Why? Because less than 70% of your hours worked in any day are going to be billable, 10% to 20% of your time will be spent solving problems and another 10% to 20% will be spent thinking of or pitching for new business. A thousand dollars a day sounds a lot. To the greedy client or just an unthinking client it is $365,000 a year whereas in reality it is half that at best and that’s before you make a profit. As a self-employed consultant in the service industry you work long hours, you interrupt your family life, you worry at nights and weekends and you deliver a great product and service. Wake up to this and let your fee reflect the quality and value of your work. Most SME professionals I see are really working for very little financial reward indeed and telling yourself it’s just until you get established is WRONG. You are established and that is why you can offer such quality and value in your work. If your pricing is wrong, your business is stuffed! In 5 years’ time 85% of SME’s started in 2014 will have failed – poor pricing will play a large part in their downfall.

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