W hen I started my business in 1979 I mowed lawns, mulched yards, cut firewood, cleaned gutters, and did about everything else my clients asked. As my business grew and I began taking on more clients, I started to realize that it’s too hard to be everything to everybody.
At the end of the day, it’s not feasible to say yes to everything. Typically, small businesses are not equipped to competitively provide all types of services and make a profit, and they must draw a line and decide which service lines to keep.
This is easier said than done. It’s hard to say no to a client when you want to be the “go-to” company. It’s also hard to stop offering a service that you are passionate about or enjoy because it doesn’t provide a good return on your time.
So how do you make this determination? What can you do to evaluate your business before you get to a breaking point?
Examine your profit centers
Start by examining your profit centers. Your profit and loss (P&L) statement will be telling, as will dissecting your customer base and measuring your return on investment (ROI) and return on your time (ROT) for each service offering.
Evaluate each of your profit centers. What does each return to you in dollars and percentage of business?
Next look at your customer base. You have to pull out key indicators about the customers in each profit center to truly know the value of performing the services in that profit center.
Answer the following three questions about your customer base to uncover the risks associated with each profit center:
• How many customers does your profit center service?
• What is the average revenue per customer?
• If you remove the three largest customers and redo the above calculation, what happens to the average? Remove the smallest three customers and do the same.
What are your averages telling you? If removing your top three clients drops your average revenue per customer significantly, then you know your exposure is high if you lose one of them. You also know that this profit center, if left unchanged, might be a risky area to devote a lot of the company’s time and resources.
Your retention rate is another telltale sign of the value of the profit center. The longer you retain a customer, or the more frequently a customer does business with you, the greater value they have to your business (provided they’re profitable to work for). It’s also likely the profit center has a greater value to your business.
A healthy profit center has balance between the customers and good margins that allow for a consistent profit return, and a sustainable customer that continues to do business with you year after year. If this isn’t the case for one of your profit centers, you need to know your ROI and ROT to determine its value to your business.
Measure your ROI and ROT
Capital intensity, management intensity, overall expertise and completion timeline are all pieces of the profit center valuation puzzle. You have to know how much time and resources you and your key people are devoting to winning and servicing the work in each of your profit centers.
If you don’t know these numbers, start tracking your job costs and direct overhead costs associated with performing the work for that profit center or customer base.
A general sales report is a must to help you determine your ROI and ROT. How many bids or dollars (time spent on payroll, etc., to get the bid done) does it take to win the work in your profit centers?
Are you over-diversified?
Running a business is tough enough without spreading yourself thin among too many markets or profit centers.
The fewer business lines you have the greater the opportunity to become competent and profitable in them. Offering multiple services for different revenue streams is a good thing, but don’t diversify too much. Complementary services that serve the same customer base may make more sense.
Mike Rorie has been a participant in the snow and ice industry for nearly four decades. He owns GroundSystems and is CEO of GIS Dynamics, parent company to Go iLawn and Go iPave. Contact him at Sales@gisdynamics.com.