In the second of a two part series, Peter Cox provides some tips on how to improve your profitability, cash flow and overall job satisfaction.
In the previous part of this series, I examined some of the pitfalls in operating a pest management operation. In this part, I will complete the list (and by the way this is just my opinion and experience) and you can explore whether any of these are affecting your business.
5. Poor inventory management
I have always said there are two ways to estimate the stock turn of a product on the shelf. Go to the computer and look at the screen, or measure the dust around the base of the product. I made the point in the last article the importance of differentiation from the competitors and not using price as the weapon. If you have a shop front perhaps having a clean store, shelves, uncluttered counter and being an easy place to shop could make the difference.
6. There is only one reason you go out of business – you run out of cash
Yes the cash is tied up on the sales floor, vehicles and shelf but you are not out of the woods when a sale is made to an account customer. Then the real fun can start in getting the payment. In 2015 I am still amazed at the number of operations that have no credit procedures. That is, no formal credit approval process for new commercial customers, or for existing account customers who substantially increase the operations exposure. Collecting the account becomes priority ‘Z’, probably because we like to make the sale and negotiate and hopefully the payment will look after itself. Remember, a sale is not a sale until it is paid for!
7. Relying on the accountant for planning and advice
Most accountants would run rings around me when it comes to tax advice as this is a very specialist field where a professional needs to keep themselves up to date and practice tax accounting on a daily basis. However, I have always believed that the purpose of running a pest management operation is to have a tax problem and the bigger the tax problem the better. That is, maximise the profitability of the business. For many owners their superannuation is the business itself and to maximise goodwill the business has to have a proven record of profitability and good asset management. If you are in a member-based organisation, meetings are handy to talk to other members about your challenges and what has worked for them. A good relationship with sales representatives can also help as they meet with a number of operators each month and can pass on successes they have seen in other operations.
8. Benchmarking your results
I am all for benchmarking the operation’s key performance indicators against other pest management businesses. This can help you prioritise your attention areas and then put together a strategy to improve. But this is based on one caveat – that your results are being compared to similar operations with your sales mix and commercial activity. The gross profit margin of a consumer-based sales mix is usually higher than an operation specialising in trade and commercial clients. When benchmarking, the rule is compare ‘apple to apples’, not ‘apples to oranges’.
9. Not spotting the trends
If benchmarking is unavailable then a simple trend analysis of the store results is handy. I have four key performance indicators that I review with my clients every quarter. They are the following:
- Margin and inventory management (GMROI)
- Staff productivity – gross profit per person in dollars
- Risk – margin of safety
- Return – return on investment.
This review only takes a few minutes but is priceless when you have several years of data.
10. Succession planning
I have always worked on a rule of thumb that it can take up to five years to maximise the goodwill and plan the exit strategy. In this publication I have published a series of articles on how to calculate goodwill and on my web site is a simple goodwill calculator for a pest management operation. Hoping that one day someone will ring and want to buy your operation is just that, hope.
Peter Cox, Peter M Cox & Associates