Like fruit trees, you must prune your business to fuel business success. We can create an unholy mess in our zeal to grow our small business. Learn how to prune your business to increase it to its next level of prosperity.
How do plants grow?
Sunlight, water, and nutrients are the growth foods for plants. Nature feeds plants to help them grow. A benevolent farmer tends plants to maximize growth and production. Pruning is one activity that increases growth.
Pruning is cutting off limbs from trees to accomplish four key objectives: 1) improve nutrient flow to remaining limbs; 2) improve quality of fruit produced; 3) prevent the spread of infected limbs; and 4) improve light and air to remaining limbs. All four of these items foster healthy and controlled growth. The concept of pruning a plant is to rid the plant of random and wasted growth. After waste is removed, the healthy portion of the plant grows better.
How does plant growth relate to business growth?
In the case of your business, if you’re feeding the wrong activities, you’ll starve the right activities and kill your business. Unlike plants that get water and nutrients from a benevolent farmer, businesses get cash through three methods:
- Debt – given by a bank that is repaid by profits.
- Investment – given by investors who expect a return from profits.
- Profit – given by customers for the value you give them.
If it isn’t pruned, a tree will grow out of control and look ugly. A business, on the other hand, will die if it is not pruned. Why? Because a business’s food source (cash) will be cut off.
Think about it…
- A bank would be foolish to loan you money if you have an unprofitable business.
- What investor will invest in your company if your company isn’t profitable?
- What customer will buy your goods and services if they’re overpriced and poor quality?
Sorry to repeat this so many times, but you must realize the cycle of your business and why pruning is necessary. A business’s nutrients are cash, which comes indirectly or directly from profits. You cannot make profits without pruning.
How do you prune your business?
I look at businesses like a machine (also a tree, apparently). Five components of this machine must be part of the pruning process: 1) Marketing, 2) Sales, 3) Operations, 4) Employees, and 5) Finance.
Pruning Marketing
New business owners tend to attempt to sell their product or service to everyone who could possibly buy it. If this is you, stop it! The more directed your messaging is, the stronger your niche will be and the more effective you will be at attracting your ideal customers.
To prune your marketing, you must focus on your ideal customers. Once you gain enough traction in your niche market, then, and only then, attempt to expand to other markets.
Pruning Sales
Selling is moving your prospect from a place of interest to making a purchase. In many cases, this process involves education and trust-building. The length of your sales process could be five seconds or five months.
The key to pruning your sales process is to include only the steps that add value to your business and to your customers. If you have steps that are a waste of time, you’ll lose prospective customers, increase sales costs, and frustrate your salespeople.
Another need to prune in sales is wasted time on prospective clients who will never buy your products. Qualification or disqualification must occur early in the sales process.
Pruning Operations
Operations is creating your product or delivering your service to your customers. Customers rightly want value, and as the business owner, you want profit. Operations must be as efficient as possible to deliver both ingredients to grow your business. To prune operations, constantly review supplier agreements, cost of goods sold, customer satisfaction, and delivered gross margins. Cut out unneeded expenses and innovate processes to create greater value than your competition, and your business will continue to grow.
Pruning Employees
The most sensitive and yet most overlooked pruning activity is your employees. Before I discuss the pruning process with your employees, I want to point out an important truth. Employees are living and breathing people. These highly valuable souls have bills to pay, a family to support, and lives to live. They are NOT to be thought of as dead limbs that will be discarded in the trash.
How, then, can we talk about pruning such high-valued people?
The pruning process with employees has three possibilities:
- Reward High Performers: Employees who are doing well for your business must be rewarded accordingly.
- Develop Potential: If employees have great character, fit your culture, and lack knowledge, invest in training, and you’ll reap great rewards.
- Not a Fit: If an employee has demonstrated that they belong in a different career with a different company, release them and let them go.
The first two seem obvious. The third one is a challenge for most small business owners. My most difficult task as an employer was firing employees. Yet, it was the most beneficial act for those employees and my business.
When you keep an employee who is not a good fit with your company, you limit the company’s ability, penalize your good employees, and limit the growth of that individual.
There’s a second type of employee pruning. It’s the way you organize and staff your business. There are three key factors in succeeding at creating the perfect organizational structure:
- Avoid understaffing: This may seem like the opposite of pruning, and it is. It’s possible to over-prune a tree. It is also possible to over-prune your business. If you need someone to complete a vital role, hire them and pay them what they’re worth. See what activities you’re outsourcing that should be insourced.
- Avoid overstaffing: This may seem obvious, but it’s one of the main problems facing inexperienced small business owners. When you add staff that you don’t need, they’ll create inefficiency throughout your organization. You’ll need to train this individual, provide direction, and task this individual with busy work. This robs the rest of your organization, your customers, and your investors.
- Role clarity: Failing to communicate roles or work direction to new employees is like adding dead branches to a tree. If your new employee is high talent, they’ll get frustrated and leave. If they’re a low-quality employee, they’ll stick around and suck the life out of your business.
Organizational structure is sometimes difficult to fully anticipate in a growing business, but it’s critical that you review it on a yearly basis to ensure you’re not inadvertently ignoring dead branches that ought to be pruned.
Pruning Finance
The most apparent pruning opportunities will show up in your profit & loss statement. Net profit should be at least 5% to 15%, depending on how your business is structured. If profit exceeds this number, you may have a scarcity money mindset that nitpicks needed expenses. This would be over-pruning.
The typical problem with finance is not enough profit. When profit is below what it ought to be, growth is stifled.
Expenses are Too High
Excess expenses cause low profit. Pruning expenses is setting and sticking to a realistic budget. The expense budget includes sales, marketing, and any cost that doesn’t directly relate to the manufacturing of a product or the delivery of a service to a customer. Expenses should be no more than 40% of revenue.
Prices are Too Low
Profits will suffer when you set your price lower than it should be. Check your competition and ensure you are setting your prices properly. Check the other two low-profit categories if you have the right price and still have low profits.
Cost of Goods is Too High
Cost of Goods or Direct Costs are the costs directly related to the manufacture of a product or the delivery of a service to a customer. These costs are also called variable costs that vary with production. In most companies, direct costs are 50% of revenue, which allows the company to earn a gross margin of 50%. If 40% of revenue is used for expenses, this yields a 10% profit margin.
Pruning finances keeps your costs and revenues in line with reasonable expectations.
Conclusion
Pruning is all about keeping your company lean and efficient. Just like pruning helps plants grow big and strong, pruning will help your company grow.
Jeff Schuster is the author of this post and is a business coach with Mechanics & Mindset Business Coaching. Jeff has published several more blog posts, podcasts, and videos on business mechanics, mindset, and coaching. Please set up a complimentary coaching session with Jeff if you’d like to share your business situation and gain insight into what may help you grow your business to the next level.
