Small businesses face risky scenarios ALL. THE. TIME. And while you can’t anticipate every little thing, you can prepare yourself for the most common ones you’ll face.
Risk scenario 1: Shutting down a product line
I am constantly telling clients they should be looking at their margins and evaluating their business and offerings consistently, not when a crisis hits. So if you see your margins are declining to the point that it’s almost costing you money to keep something alive, you need to ask yourself:
- What is the benefit of this service or product?
- Is this a core part of my business offering that needs to be re-engineered?
- Has the landscape changed, making the product or service no longer viable?
But here’s the biggest question you need to ask yourself: Is this truly the end of the line or is it just a bad moment in time?
One of our manufacturing clients is suffering because the cost of the wood they use has tripled. He decided it was just a moment in time and that eventually prices would normalize so he temporarily stopped offering certain products and focused instead on others. We’ll revisit in a few months and if he realizes it’s not just a moment in time, then he’ll re-evaluate and either 1) find new materials 2) raise prices or 3) discontinue the product line.
And while it’s fairly easy (for me =) to forecast what effect these changes will have on revenue or net income, many business owners don’t take into consideration what these decisions might mean for the whole business. Maybe the product’s not a cash cow but acts as loss-leader to get people interested in your business and you’re able to upsell from it. Or if you have a dedicated salesperson who only sells that product, can they be retrained? Make sure to think about the decision holistically and not just as it relates to the individual product.
Risk scenario 2: Expanding into a new line of business
Maybe you’re thinking about expanding into a new line of business or a new product offering. In this case, ask yourself: How does this fit into my overall portfolio of offerings? As a fractional CFO, if I, all of a sudden, decided to start offering marketing services, it would denigrate the value of my business, because I am an expert in finance, so I should have finance offerings and things that are more consistent with that.
If you’ve decided your new offering does fit into your overall business model, ask the following:
- How will you introduce it to your existing clients?
- How will you get the message out to a new target market?
- Do you have the resources to support this new offering?
And don’t sleep on that last one. Are you going to need a different skill set? What do you need to service the business in terms of people or costs? And are those costs one-time costs or are they ongoing costs?
For retail businesses, one of the biggest mistakes I see is when owners garner great success at one location, and they think it’s kind of a rinse-and-repeat at another location. But you want to make sure the environment — whether it’s geographic or economic — of the place you’re opening is similar to the environment you’re currently in. If the average income of the new location is 30% less than the current location, consumers may not be able to afford your product.
Do you know the cash requirements of opening a new place? And do you have the capital available to support that plus the ongoing costs?
Consider the competition. You may be a super successful donut shop because you have great donuts or because you’re the only donut shop within 10 miles. Make sure there aren’t 10 other donut shops near your new location.
There are lots of things to think about, and while you can’t take them all into consideration, make sure you’re thinking about some. And if you need help, call me and we’ll workshop it together.
