04 Nov The Great Reinvention of 2020
The Great Reinvention of 2020
2020 has been a year of survival for small businesses across the globe, with nothing going “to plan” or smoothly throughout this pandemic.
The 80/20 Rule
I recently participated in a teleconference with my fellow Profit First Professional Mastery members called “The Great Reinvention”. Led by Mike Michalowicz, we reviewed the concept of Pareto’s Principle, otherwise known as the 80/20 Rule: 80% of your results come from 20% of your effort. So for small biz owners, the big question is: of all that painfully long list of stuff that we do in a given day, what portion of it is actually yielding results and what portion is plain old busy work?
The 80/20 Rule as it Applies to Small Businesses
This principle works for small business revenue, in that 80% of your revenue is generated by the top 20% of your clients. That said, in a down year/s, there is the beautiful opportunity to reinvent oneself. There are about 28 Million small businesses in the USA that are under $25 Million in annual revenue. Small business is dictated by that Pareto Principle for each one of these 28 Million businesses, about 20% of their clients are generating 80% of the revenue. If we have 100 clients, about 20 of those clients are generating 80% of the company’s revenue. When we fall on hard times and a handful of those 20 business go under, our own small business is at risk. It only takes the loss of 2-5 top clients for a small business to fail, following this principle. The opportunity for The Great Reinvention comes when we can see how the market is playing out and we are able – instead of shrinking under the pressure – to reinvent our products and services in a way that will allow us to pick up new clients.
Reconciled Solutions has a current client for whom we are implementing a new accounting system and Profit First simultaneously. When we started working with this client, his was one of the 83% of all small businesses surviving check-to-check, (around 11,620,000 small businesses today don’t know if they can make payroll next week-let alone next month). He had fallen subject to hard times and had reached out to predatory lenders who lend, based on receivables, at high interest rates to keep himself in business. Knowing that the road out of predatory lending is difficult, our business owner Joe made significant product line reductions. Instead of being a jack-of-all trades, he got rid of the many products that were one-time customizations and reduced his product offerings by about 65%. Because he had so many fewer SKU’s, he was then able to significantly cut back on staffing; in the past, these employees had been fulfilling customized orders and making free deliveries of product. Instead of focusing on individuality, he decided that the health and wellness of the business depended upon building efficiency and quality controls repetitively for the greater good of the total client base.
From there, we set up his accounting system. To be able to “clean house”, you have to take stock of what you already have. Customized product sitting on shelves unsold is an example of hidden money in your business. It needs to be sold, at one price or another, to increase cash on hand and free up physical space and mental space. We found a tech system that feeds into QuickBooks Online to track inventory and manage purchase orders for all channels of business, where in the past, he had one system that was managing inventory counts for all 4 channels of business, when it only had the method and technology to support one of his 4 channels of business. Therefore, his inventory count was always off. We started tracking revenue stream by product line and cost of goods sold by product line so we could see the difference in gross margins on the different product lines.
Surviving Thanks to the CARES Act
When pandemic hit, Joe was well-positioned to apply for government funding from the CARES Act because his financials had been cleaned, consolidated and presented a clear picture of the business-a juicy story was at his fingertips to show to lenders. Joe was very successful in qualifying for government funding and with an influx of cash on hand, he was able to pay off predatory lenders with high-quality, low cost debt through the CARES Act. As we have implemented Profit First into his business, Joe now knows that every dollar has a place in his business and is working toward the overall health and wellness of the business. This lends itself for success in his own life, by providing a better quality of life for himself and his family, along with his employees. Guess what? He is hiring again! These new efficiencies have allowed him to pitch to bigger clientele and it has created opportunity for more work within the industry. Joe is adding to the economy in this way, through expanding his workforce and helping others support their own families. Even though his total revenue is still down by 15% because of pandemic, his total net income is up 90% over last year. Isn’t that a beautiful case study of success? We have been able to make all those changes in under one year. How life has changed for Joe!
Emergency Fund = Three Months’ Worth of Operating Expenses
Joe, along with other clients of ours at Reconciled Solutions have been able to use this CARES Act funding to pay off past debts and to create that emergency fund. We have been successful in implementing Profit First into so many businesses, all of which were stronger in pandemic, because they had taken the time to get their finances in order. The government funding through the PPP and EIDL has been instrumental in their great reinventions, making needed improvements, pivoting and re-positioning and in building up that safety net of emergency funds. Every business owner should have 3 months’ worth of operating expenses set aside in the event that if they had to suddenly close their doors, like so many of us did in March, that the business could sustain itself for 3 months without another penny coming in. That said, having 3 months of emergency fund is no small task and with the help of the government funding, I hope you too are positioned to jump into the next step of the Great Reinvention of 2020.