“When did your business really take off?” I was asked this very question when I was on a book tour years ago. The answer was very clear to me. And the reasons behind my answer provide a number of great lessons for anyone running a small business.
While I had many small businesses in college and during business school, my first full time venture was a book publisher which initially had the less than exciting name of Bob Adams, Inc. (I eventually changed the name to Adams Media Corporation, finally selling the Business to F+W Media, who in turn sold the business to Simon & Schuster.) I had been in business for 3 or 4 years and while sales were growing okay, profit margins were always disappointing.
This was probably because of my business school education, I became a strong believer in developing a full-blown business plan and carefully updating each year. Every fall I would update the business plan for the next year, and get excited about how the upcoming year looked so much more promising, at least on paper, than the current year. However, about midway through the next year I would realize that we weren’t going to come close to hitting that year’s profit projections. I would try harder and would run the business the best I could. But sure enough, year after year, we kept falling far short of our profit projections.
So finally, after this had been going on for several years, I sat down, had a little talk with myself, and tried to take a realistic look at what was happening. (Of course, I might have done this years earlier if I had set up a board of advisors or at least invited a trusted friend to take a deep look at the continually disappointing performance of my business).
What I concluded was that I set the sales goals in the budget a little too high for what the business could readily achieve.Then, during the course of the year, because we were missing the sales goals, I would pour on additional marketing effort. Furthermore, the more we missed our sales goals, the more I desperately threw money into marketing.
I wanted to believe that with the next new marketing idea that I came across would instantly solve all of our sales problems and all of our profitability problems. So, when each new sales rep called with flashy marketing program, I pulled out my wallet spent more money, regardless of how far over my initial budget I was. Almost invariably when I dove into these marketing ideas, the results were disappointing.
So, year after year I was ending up with sales that were close to or a little under my budget goal, but profit levels that were more like half of what I had planned for at the beginning of the year.
Then one year I did something different. I came up with an easier to achieve sales goal for the following year. More importantly, I actually stayed within my expense budget, including for marketing.
The results from this simple change in discipline was amazing. Profits doubled! Yet I was basically running the same business as the years before, with only marginally higher sales levels.
Here are the important lessons that I learned:
- Setting up a business plan and budget for each year can be a powerful tool for driving your business ahead.
- Make your sales projections realistic or you could have a very frustrating year or be tempted to overspend to try to reach your projections.
- Be disciplined to stay within your budget.
- Do not try expensive marketing campaigns without testing them in small ways first.
- Even if you do everything “right” it could take a few years to achieve an excellent profit margin.
- Don’t get carried away focusing on just sales growth – profits matter too!