This is especially true when choices are based on “sunk costs.” Broadly defined, sunk costs are past expenses that are irrelevant to current decisions. For example, many firms hire consultants who sell and install software. In some cases, a company is still waiting — three or four years into the contract term — for a functional and error-free system. Meanwhile, costs continue to escalate. But are those costs relevant? Managers, especially those who initially procured the software and contractor, may reason that pulling the plug on a failed contract would be “wasting all that money we’ve spent.”

Not true. That money is “sunk”; it’s beside the point. Deciding to continue with a non-performing contract instead of staunching the flow of cash and changing course is irrational. It may be difficult to admit that a mistake was made. It may bruise the ego of the decision maker. But abandoning a failed contract is often the wisest decision. The only relevant costs are those that influence the company’s current and future operations.

Irrelevant costs:

Let’s say your firm hires a new salesman. You spend thousands of dollars sending him to training seminars. You assign mentors who take time from their busy schedules to provide on-the-job coaching and oversight. But despite your best efforts, the new hire isn’t working out. He doesn’t fit your firm’s culture; he doesn’t grasp the company’s goals and procedures; he doesn’t generate adequate revenues for the business. As a manager, what should you do? At some point, you may need to terminate that employee and start over with someone else. But what about all that time and money you spent training and mentoring the new salesman? Those costs are irrelevant; they’re “sunk.” You can’t get them back. So the best decision — as of today — may involve cutting your losses and starting anew.

Other examples of sunk costs may be found in the areas of product research, advertising, inventory, equipment, investments, and other types of business expense. In each of these areas, companies spend money that can’t be recovered, dollars that become irrelevant for current decision making.

Sunk costs may also cloud one’s judgment in the arena of investing. In a completely rational world, people would base investment decisions on the bedrock of estimated future returns. Of course, that’s not the real world. Investors hold stocks in companies that are careening into bankruptcy, all the while refusing to sell because they’ve already committed so much money. Understandable, but foolish. Emotional, not rational. Throwing good money after bad won’t salvage a poor investment — or a poor investment decision.

2011 has been a tumultuous year. We have seen plenty of evidence of nature at its worst and the economic decisions made by various parties haven’t made for a jubilant time either.

If you haven’t done so already we strongly recommend that you take a look at your company and identify the areas of risk.

Which areas, if adversely affected, would have the greatest impact on your ability to conduct your business?

Disasters can be quantified in many terms. Some risks can be covered by insurance while others can be reduced by the manager working ON the business rather than IN it.

Start with the basics and protect your business records and inventory. Make sure electronic sources are backed up and stored safely in an alternate location. Losing documentation is usually detrimental. Stay up to date on your emergency protocols.

There are many resources on the internet that are specifically designed for smaller businesses allowing you to prepare for the worst case scenario.

Research and compile your own contingency plan. The more detailed your contingency plan the better and make sure the information is shared with your team.

“Financial crises, stock market crashes, and natural disasters can negatively affect a business.”

Businesses prosper based on what they do, how they respond to change, how they capitalize on opportunities and how they respond to challenges.

There lies the key difference between businesses that succeed in adversity and those that don’t.

In order to thrive it is not enough to survive but grow. But a growth strategy doesn’t necessarily have to be a high risk strategy. Too many company owners embark on an unnecessarily dangerous journey by trying to be everything to everyone.

A highly esteemed business professor at Harvard by the name of Michael Porter expressed the view that there are only two ways a firm can gain a competitive advantage.

One way is to differentiate. The other way is by being a low-cost producer. By low-cost, Michael Porter wasn’t talking about discounting.

To be a low-cost producer a business needs to be able to source key components of their product or service at a price that their competitors can’t match.

This allows the firm to maintain a viable margin and therefore be able to compete profitably. Both of these views are in themselves interesting strategies that we will cover in more detail in the future.

However it is interesting to compare these ideas with common methods adopted by a significant number of small businesses.

One errant but all-too-common strategy is to try to be all things to all people.

From a high level this type of strategy does make sense. It’s all about creating more clients and a sure fire way of doing that is to create more products and services to encourage them to buy.

“More products and services usually require a higher level of investment.”

This also increases the demands on the business to support and provide knowledge on these additions.

Another downside is that clients may start to see your business as something of a general store rather than a business that has carefully selected what it does and how it does it better than anyone else.

In some cases, the client will account for this perceived risk (real or not) by devaluing the price of the product and perhaps the value of your brand as well.

There are a number of ways to successfully grow a business. We can help you determine the pathway that will work best for your business.

Often our biggest constraint in business is ourselves. We try to personally take on the expensive tasks that would normally need to be outsourced so that we can preserve our cash resources for other needs within the business.

Although there is certain logic to this, the downside is that it means we have created our own artificial ceiling. We have set a limit on our firms ability to succeed that is significantly less than what could be achieved.

When Michael Gerber wrote in his bestseller the E-myth about the need to work ON your business he was referring to work of a strategic nature. He was talking about the need and effectiveness of planning and systemization.

Doing something that is not of a strategic nature or core to your firm because it can’t readily be done by a team member is a false economy.

A business manager’s time would be better employed doing the things that only they can do. Such things as articulating their vision in a strategic plan so that all stakeholders, team members and suppliers have a clear understanding of what the firm is about and where it is going. 

 Research shows that this applies irrespective of how small or large the firm is.

“Firms who invest their time in effective planning are far more likely to succeed and achieve their targets.”

 This is the perfect time of year for many firms to start planning for 2012 (if it hasn’t been done already). To draw a line in the sand to determine where your business is today, where you would like it to be this time next year and the action plan (or business plan) that guides you through how to implement the necessary changes in order to make it a reality.

Because we believe this is the most significant obstacle that stops businesses from achieving their goals, we have invested in resources to assist you through this process in a very cost-effective manner. It really is that important to get it right.

There are no easy answers, but running through a three-step process can help you make the right decision.

1. Know your strengths. How does your product or product range stack up against the competition? Are your products higher quality, lower quality, or indistinguishable from your competitors’ products? Do you have an edge that can justify higher prices?

How about all the other elements that make up your total service package? Do you provide a bigger inventory, faster delivery, better payment terms, wider product line, better service on returned items? If not, can you change your operations to gain an edge in any of these areas?

Consider holding a brainstorming session with your salespeople to go over these questions. The answers might point the way to pricing decisions, and they’ll certainly give you good replies to customer pricing objections.

2. Put yourself in your customers’ shoes. Try to understand your customers’ needs. Are they under profit pressure? What changes are occurring in their industry? How can you adjust your products or service to add value for them — value that they might be willing to pay for? What are their alternatives if you raise prices? If your salespeople are staying in touch with their customers, they should already have the answers to many of these questions.

3. Know your competition. Run through the same questions you asked about yourself applied to your competitors. What are their strengths and weaknesses? What can they offer your customers that you can’t? How will they respond if you change prices? Here again, your sales staff should have good information on the competition they face.

When you’ve worked through these three steps you should have a much better idea of the likely competitive effect of a price change. Run some profit scenarios and then review your pricing decision with your salespeople. Make sure they understand the rationale, and jointly rehearse how they’ll present the change to customers.

For assistance with pricing issues in your business, give us a call.

The ‘9-5’ workday is no longer an acceptable frame of mind, as we are conducting business on the go, twenty four seven. One of the strongest strategies (at no cost!) to embrace is using Skype. Skype is an internet based peer to peer communication network. On the most basic level, Skype can be used to make phone calls, from computer to computer, for free.

What is known as a Voice over Internet Protocol (VoIP) combined with Skype’s free, downloadable software can change the way you conduct everyday business. Being on the go is imperative to staying on top of your business game.

Skype to Skype calls are free- a cost-saving method of communication could not come easier. Simply visit the Skype website and download the free software package. Once the package is installed on your computer, your unique sign in name (also referred to as your ‘handle’) becomes your calling card. Add people to your contact list and be immediately connected to business associates, clients, and suppliers.

“Taking advantage of the best, fastest and cheapest modes of communication is vital.”

Skype is not like Facebook- it is not a social network and does not require you to create a profile, provide personal information or open you up to a world of social media. While a profile can be created, the basics can keep your better, faster, and stronger without the annoying hassle of anonymous requests.

Skype can now be accessed on most smartphone mobile devices. Not only does this improve accessibility issues and create a roaming-capable work life, but it reduces overhead. Cell phone costs, especially with international calls, can sky rocket.

With the Skype application a simple download away, you can make international or local calls for free to other users. The Skype function does not use your minutes or incur a charge from the telephone company.

The benefits do not stop there. With Skype, you are provided with exceptionally low calling rates, meaning that you can call cell or land lines, anywhere in the world, at reduced rates. Become more accessible; be more attentive to your long-distance clients and save money at the same time.