A Reality Check on Your Business Can Pay Big Dividends

Every now and then it is a good practice to make an assessment of your business. The goal of that assessment is to answer the questions; is your profitability in line with competitors, where are the opportunities to grow your business (assuming one of your goals is growth) have any new opportunities appeared, or have some competitors closed their doors or downsized recently and so on.

It’s best to start by putting all the information you find into a spreadsheet. We’ll use as an example, a business of a donut shop, then the heading will be the name and contact information of any other donut shops within a few miles of the local population center. Be creative. Sometimes you are not competing directly with another donut shop but with a bakery or coffee shop – so include those as well.

The next row might be hours of operation, number of employees, a note if they are a franchise, how long they have been in business at that location. You should already know peak hours and be able to estimate how much product they are able to move each day. Using this information, cost of goods, number of employees, annual sales and what it costs to rent the shop you can figure out the revenue, costs and gross margin for your own company as well as these competitor locations. Use AI Chatbots to fill in some blanks if you need to. Just be very specific about how you formulate your questions.

What you want to end up with is a comparison of your gross margin as a percentage of sales against the average gross margin of local competitors. Of course, you will want to scale these numbers based on how many similar companies are within your competing area. You also want to take into account business norms. If your business is an auto repair shop the numbers will be very different due to the nature of that business. Major repairs are very different than oil changes and auto shops are regulated and must handle a variety of potentially hazardous materials. However you can do it, if you can find three to five similar enough companies, you’ll get an idea if your business is “well run” compared to typical similar businesses or not. It is typical in this type of exercise, if you ask, “where does the money go” you’ll find around five expense items that account for the lion’s share of expenses. Often these are negotiated items (wages, raw material, equipment, etc.) and so they can be hard to change. Sometimes expanding margin is easier than cutting expenses, but not always – that’s why it’s good to know the going rate for your major expense items.

This exercise of building a financial model of competing companies helps to validate your own business. At the same time it is intended to highlight opportunities to improve the margins of your business. Since donuts are usually a breakfast thing, perhaps you could offer up breakfast sandwiches: toasted bagels, cheese, eggs and meat made to order. Another idea is that lots of donut types can be cream filled, but are not always sold that way. Do you offer that option? Sometimes just asking will result in a sale of the slightly pricier cream-filled version. How about a free cup of coffee with a dozen donuts? This can encourage the “eight-donut” customer to become a “dozen” customer. These are just a few ideas that could add to your margins for the donut shop example.

To showcase another business, if your company happens to be selling framed pictures and works of art you might offer a discount on matting to encourage a more professional look. You could promote picture frames for birthdays and holidays, made from your own digital pictures on phones (with minimum resolution standards of course). Whatever your business is, there are opportunities to cut costs and to improve margins. And it starts with a reality check of similar businesses.