Consistent and growing sales avoid sawtooth income
Imagine your new business is just up and running. What you want to see over the first year of owning a business is a consistent and growing sales income, which, after all, is what your business plan probably says. While there will be some up and down variation month to month, the business plan shows the trend is up.
The business plan lies!
There is a common trap to watch out for and avoid- “sawtooth” income.
Micro or smaller businesses can experience ‘saw tooth’ income, which can be quite dangerous as it cripples your cash flow. Read our blog, A money mindset for success.
Look at the teeth of a wood saw from the side, and you find a classic example of sharp, regular, peaks, and valleys. What has that got to do with my business? Read on.
“New or fledgling business owners can find themselves in a sawtooth income.”
Your business plan will lie if you use the wrong assumptions.
Getting Your Business Up and Running
To get your business up and running, you will put in a significant effort to win customers and get orders. Getting sales is a critical focus, as consistent and growing sales from customers should provide cash into your business.
This cash will take the pressure off your finances and start to pay for your costs.
Getting sales for some types of business can take a long time and require significant effort. Where a customer has to trust you before they will buy from you, this is especially the case. It could take weeks, possibly months, to get orders.
Examples of these businesses might be interior designers, architects, or professional services. These businesses are not transactional, like a retailer or café.
Once you win your orders, then the work must be completed. Your focus then shifts onto doing the work and impressing your new customer. This work could take considerable time to do, as is probably bespoke to the client’s needs.
While you are busy “doing the work” your marketing and sales efforts reduce. After all, you can’t be in two places at once, and owning a business soaks up your time. You also want to make sure that you do an outstanding job and spend plenty of time getting this perfect.
If you do a great job, your new customer might refer you to someone else.
When you finally complete the work and send the invoice, you look up, only to find you have no more orders. Yours sales process has stalled.
Now, you frantically turn your attention back to sales and try to win more new customers and orders. Again, this could take weeks.
During the sales process, you have no more invoices to send out, and your sales income stops. Consequently, the cash your business brought in now depletes.
The cycle can repeat. Plotting this on a graph would show sharp peaks and valleys in your sales income, just like a sawtooth pattern.
Many business costs are “fixed,” such as rent, phone bills, and insurance. They occur whether you have sales or not. You still have these costs to pay and little or no income.
Be aware and plan properly
Planning for this can help avoid some nasty surprises.
The cause of this issue is a lack of resource. The same person is being used to carry out sales and “production,” both of which are critical business functions.
Episode 6 Critical Business Functions explains the things that must happen for your business to function.
If you don’t perform all of your Critical Business Functions, then your business will suffer.
Before starting your business, you need to consider if this sawtooth income is likely to happen to you.
If the answer is “yes” then start planning how to avoid it.
For example, could you get some extra help so that you can keep the sales activity going even when you get orders?
Another possibility is to factor extra time in your week so that you can still do some sales activities during the “production” time. Perhaps you would not work fulltime on the “production” and take a little longer to complete the job. Maybe this way, you could still do networking breakfasts or evening networking and fit some meetings in your calendar.
If you have digital or social media marketing in place, you might be able to automate some of it to your sales pipeline keeps full.
Be realistic about how long it might take you to gain customers. Your customer acquisition time is the total time from the first contact until they purchase. Build this into your business plan to give you an idea of how quickly your sales will arrive.
It is tempting to be over-optimistic about how quickly you will get new customers. Customers have their issues and timescales, which do not take into account your cash needs!
As excited as you are about your product or service, your customer may not share your level of enthusiasm.
Customers can take a long time to commit, and so you need a strong sales pipeline with multiple potential customers rather than relying on just a few.
Consider what you can do to keep your sales pipeline full at all times, remembering that this is a Critical Business Function. The more steady and full your pipeline remains, then more likely you will avoid the sawtooth income trap.
Depending upon your type of business, a Customer Relationship Management system (CRM) may help you manage your pipeline. Some CRMs also offer marketing automation, which might help you.
Realistic Business Planning Tips
Preparing a few versions of your business plan is a top tip. For example, produce your budget based on what you would like to happen, which is your desired outcome. Then create another version where your sales are lower and take longer to get.
Finally, you could do a worst-case scenario with much lower and slower sales growth.
These three business plan versions will give you a bracket of outcomes and an idea of what to expect if things don’t go to plan.
We like Liveplan because it’s flexible in preparing multiple versions of a business plan.
Business planning in this way enables you to get a feel for your business and understand your break-even point and how it changes as you grow.
Your business planning will help you consider ways to avoid a sawtooth cycle that can hamper business growth.
Most importantly, ensure you have adequate cash reserves that you can draw on for when you are in the valleys! Running out of cash is a major cause of business failures, and that makes proper business planning even more critical.
Understanding Business Ownership
Using good business planning to avoid a cash crisis through consistent and growing sales is an essential part of the success equation.
Brendan Barrow Co-Host
The Should I Own A Business Podcast-Listen Before You Leap.