Thursday, January 1, 2009
We established an internet order management business in 2006 catering to specific needs of prepared food for customers in a particular city. Our business model is simple. We collect orders on our website from customers regarding their needs for ready-to-eat food from particular restaurants across the city and ensure that their orders are served within specific timeline. The restaurant owners have signed up with us as it provides another mode of business for them. With every order served successfully, we transfer money to the shop-owners after deducting our commission. Our business grew very rapidly in last two years with good profit.
In last six months, we have noticed considerable decline in business primarily because we are not able to control the quality and timeliness of deliveries which customers expect from the suppliers (restaurant owners). With orders dwindling, we are facing the risk of closing the business. Can you please suggest us some solution?
Sandy and Barbara
With the information provided by you, I have found following reasons why you are facing these problems.
1. You are not a producer but a service provider mediating between producer and consumer. However, customer is not bothered to know this difference. Hence the lack of quality and timeliness is attributed to you rather than to the restaurant owners.
2. Order-booking through internet is one of the channels for customers (and they are somehow not satisfied), they might be choosing other channels like (telephonic orders or personal visit to nearby restaurants)
3. You are focused to a particular city and to a particular type of service, so your customer base is limited
My suggestions for revamping your business is as follows.
1. Clearly mention the liability: While completing the ordering sequence on your site, the customer should be clearly notified that quality and service experience is the responsibility of supplier
2. Sign-up suppliers on clear terms: Be choosy on suppliers who sign-up for serving orders through you. Clearly mention them that the relationship with your service will be revoked if the customer complaints increase beyond a limit. Please do not be afraid that you will loose some business. It is better to build up the reputation of your site/service by loosing some unproductive suppliers. In the long-term, this policy will fetch you more customers as well as suppliers.
3. Customer feedback for every order: Institute a feedback mechanism on your site for every order. Dissatisfied customers will certainly give the feedback, though it is not always true with satisfied customers. Share the feedback with suppliers and ensure they improve their product/service. If the feedbacks are consistently negative, break your relationship with these suppliers.
4. Expand your basket of services – you can sign up with gift shops, birthday shops, florists and other such small business owners in your area and take orders on their behalf. Your core business is “facilitating order booking through internet” and not “order booking for ready-to-eat food”. With this shift in focus, you will be able to cater broader customer base with steady steam of revenue. You can even differentiate your discount structure to earn more profit on high-margin orders.
I am sure if you follow these steps, your business will improve in near future. Do write to me if you find my suggestions helpful and encourage your friends to write to me for any advice for their business.
Monday, May 12, 2008
Profitability decides what will be the net monetary outcome of our business in a financial year. It comes after you have deducted from your revenues all possible kind of costs to run your business. A constant tab on profitability is extremely important for the sake of existence in the market. After all, if the business is neither generating profit nor has any potential to do so in near future, it is practically futile to continue with the decaying business unless you have great emotional attachment – which rarely makes any business sense. However, the management has better levers to control the profitability by controlling the cost side of business e.g. operations, investments, finances etc.
The cash flow includes the cash outflow and cash inflow of your business. The cash outflow occurs to bear account payables, interest payments, salaries, operational expenses, capital expenses etc. It is relatively easy to manage the cash outflow by optimizing your operations, extending the account payable cycles and properly structuring other payments. The cash inflow is largely generated from the revenues of your business. It comes primarily from your customers and is mostly external. Since it is external and market-dependent, it is much more difficult to control. You need to manage customer relationships, marketing campaigns, new product and service launches, operational efficiencies, account receivable etc. in a very organized way to ensure steady cash inflow. You have to be extremely cautious about the market competition, market share, possibility of new products, threat of substitutes of your product and services. You need to adapt your business continuously to maintain steady revenue growth. Cash flow problem hits you so fast that you have very little time to realize it. Since your cash inflow is dependent on your customers and their business, you need to keep a constant watch on it and try your best to improve it. It is beneficial to have monthly and quarterly tab on the cash inflow and outflow to plan and control it properly.
The cash flow is like life blood of your business while profitability is the muscle. If your business is low on cash flow balance, it will be anemic and will die down. If you do not have sufficient muscle power you can not continue your business in the long run. However, managing profitability is relatively easier as it is more internal and long-term while cash flow is largely external and short-term. Nearly 70% of businesses close down primarily because of cash flow problems leading to liquidity issues (when a business owner is not able to pay its obligations) and not because of profitability problems.
My established opinion is that profitability and cash flow both are important. However, it is better to focus closely on your cash flow as it is difficult to control and hits you hard, particularly if you are running a small business where you do not have too much reserve. So, it is “Profitability AND Cash flow”, not “Profitability OR Cash flow”.
Thursday, January 24, 2008
The origin of the crisis
The sub-prime crisis has ultimately started showing its impact on economy. There is real danger of US economy slipping into recession. Most of the US banks are exposed to the sub-prime exposure, the loans offered to borrowers not having sufficient means to pay back interest and the principal. Though the fear was looming, it exploded in 2007 when series of Banks in the US started writing-off billions of dollars from their assets.
These bad debts ate up the credit capital of the banks leading to the credit crunch in the US economy. The consumers and firms were not able to find easy money to fund their planned spending. This credit crunch led to reduction in overall production and hence the fear of slowing down of economy. The Fed tried to salvage the situation by cutting the interest rates. Though it reflected a temporary relief, the impact was not substantial. Ultimately, the president has proposed a package of $140 billion of tax relief.
Why this package?
When there is a sudden shock in the economy, like sub-prime crisis, the planned aggregate spending and hence the demand in the economy gets squeezed. There are four major components of the planned aggregate spending in an economy- spending by consumers called consumption, spending by firms on new projects called investment, government expenditure and net exports. The contribution of consumption and investment spending together contribute to nearly eighty percent of the planned spending.
When the planned spending is reduced by consumers and firms, the aggregate demand in the economy shrinks. Naturally, if consumers are not wiling to buy more, the producers of consumer products can not produce beyond a certain level of demand. If the people in a town, for example, decide to drink only one bottle of wine in a week instead of two, the brewery will have to cut its production by half. Now if the brewery cuts its production by half, it will cut its input supplies also by half. Similarly, if the firms reduce their investments on new projects, other firms supplying products and services to these firms will have to cut production. This chain effect spirals down the economy in many of the connected businesses and hence the economy starts slowing down. In this situation, the government attempts to increase the planned spending to spur the demand in the economy.
The package of $140 billion tax relief to consumers and firms is intended to increase the planned spending in the economy. It is proposed to be given in the form of broad-based tax relief to increase the demand at all level in the economy. When tax-relief package reaches to people in form of checks, the disposable income of the consumers and firms increase. And, natural tendency of human being is that we want to avail and enjoy more, if we have more disposable money. To revert back to our example of wine consumption, if we have more money, we will be naturally inclined to consume our normal two bottle of wine.
If President Bush’s tax-relief proposal is accepted by the Congress, which is likely in the election year, it may push the demand in near future. However, all of this tax-relief package may not get converted into disposable income and hence may not increase consumption significantly. Some analysts believe that a large portion of this tax-relief package may go to the credit card payment which people already owe to credit card companies and hence they may not spend on consumption. Though this argument may be correct to some extent, government can certainly increase the quantum of tax-relief to increase demand. However, these fiscal measures take time as these have to be approved by the congress, then the relief should reach to people and people should start spending more.
Impact on small businesses
When the economy enters the recessionary mode, the demand at all level is low। As discussed earlier, the chain effect of this low demand spirals through most of the businesses. This situation leads to squeeze in profit and ultimately into loss. As a small business owner, you need to do the following.
- Watch the trend of the demand of your products on monthly basis comparing it with the demand of the same month in previous years and also with the demands with previous month in this year। If you sense that the demand of your product has reduced considerably in the recession phase without any obvious reason, your business is probably hit by recession virus
- In recessionary phase, it is always better to plan to cut your cost to the extent possible। Stop all new projects, expansion plans etc. and stick to bare minimum to keep your business running. If you are fortunate to receive the tax-relief package of the government, you may cautiously think of investing in a new project which is most suitable to your business needs.
- Try to reduce variable expenses by optimizing your operations
- Try cutting your fixed cost in a phased manner
- Look for alternative sources of revenue using the same set of production set-up to utilize your investments to the fullest