Far too many business owners suffer from a lack of time.
The business takes everything they have in terms of time and energy. They run from one fire to another – doing their best to put them out quickly. There is no spare time; there is no spare energy. They lack margin. The company owns them.
Because their profit margin is low or unpredictable, they cannot hire people with the expertise to help them grow their businesses – the profits are too small and the uncertainty around whether the people will perform is too great. Therefore, they continue to suffer.
All my blog posts are designed to change that reality of too little margin, whether in business or in life.
What is Margin?
Simply put, margin is the excess. Net profit margin is the excess of revenue over expenses and is expressed as a percentage. Life margin is the excess of time and energy available for discretionary things. Higher net profit margins lead to greater life margin.
The true purpose of a business is to add value to the owner's life and to others’ lives, not to take over everything in its path. Too many business owners have zero life margin, and the best first step toward fixing that situation is to increase profit margin.
The beauty here is that once business owners have greater profit and life margins, they can improve their businesses even more. If owners are in a reactive state, handling catastrophes every hour, they will struggle.
Increasing life margin is far better in the long run – for both the owner’s sanity and for the business’s bottom line. In this way, life and profit margin are inseparable: each benefits the other.
Annual Planning for Strategic Growth
Most business owners plan on an annual basis. Often this planning is reduced to numbers in a budget. In other words, the budget is the financial representation of ideas and plans that will be implemented in the next year.
To decrease time in planning and budgeting, I encourage my clients to do some “pre-planning” now. This pre-planning will also help improve profit margin and life margin.
The last two posts spoke about raising prices. The first post discussed how to know when it is the right time to raise prices, and the second delved into how to ensure that price increases go smoothly. Considering the need for price increases is an important part of pre-planning.
In this post and the next two posts, I am going to discuss the concept of “portfolio analysis,” another vital piece of the pre-planning process.
What is Portfolio Analysis?
When the word “portfolio” comes up in conversation, most people will think of mutual funds.
A mutual fund is a portfolio of stocks and bonds. There are some winners and some losers in every portfolio. The mutual fund’s investment return is a blend or average of the individual returns of the stocks and bonds. A financial portfolio manager will seek to optimize the portfolio to maximize return for the client.
When applied to high-level business management, creating a portfolio analysis means taking a critical look at the business, picking out the “winners and losers.” Then the portfolio analysis can inform the strategic course of action needed on the part of the business owner. That strategic action should lead to higher profit margins and life margins.
Below are a few examples of things that make up portfolios to analyze:
- Products or services offered by the business
- Customers, across different demographics, served by the business
- Business divisions, some of which may have subdivisions of their own
Embedded in each portfolio are business offerings, customers, or divisions of great profitability and poor profitability. After performing a detailed portfolio analysis, a business owner might find some offerings, customers, or divisions that consistently reduce profitability. (These situations should be eliminated wherever possible.)
This situation means that a portfolio analysis can lead to significant change for a business, which should lead to increased profit margin when implemented correctly. I will provide some case studies in two weeks.
Goals of Portfolio Analysis
The major goals of portfolio analysis follow:
- Greater profit margin
- Strategic assessment of current customers
- Strategic assessment of current product/service offerings
The first goal, “greater profit margin,” is simple. Getting to greater profit margin simply means increasing pre-tax net income divided by revenue. The correct path to that outcome is determined in part by the second and third analyses.
The second and third goals are somewhat intertwined – both involve “strategic thinking.” In this case, thinking strategically means identifying who & what is most profitable; who & what is least profitable; and why. Answering the “why” question will provide great strategic insight as you plan the company’s growth. As you analyze what is most profitable and least profitable by asking “why,” you may not find the true reason by asking “why” just one time. Some experts suggest asking “why” five times to uncover the true reason for the result.
In other words, the analyses of the most profitable current customers and business offerings should reveal what is most valuable for the company over the long term, as well as what differentiates the company from its competitors.
In this way, the second and third goals of portfolio analysis provide direction for expansion and may be useful in determining which products and services should be promoted to specific customers, or even how much to spend promoting specific products and services.
Conducting portfolio analysis will also provide greater direction for marketing and sales teams to target their work to what is most profitable for the business. A smart business owner can capitalize on the information yielded by a thorough portfolio analysis to build greater margins in profit and life.
In my next blog post, I will explain how to calculate profit by business offering, customer, and division.
Read the Whole Series
Part 1 (this post) - Craving Business Sanity? Get a Portfolio Analysis