Regional Growth Rates Differ, Take Heed

The Bureau of Economic Analysis recently reported state and regional growth statistics for 2007. No surprise that the Great Lakes region showed the slowest growth overall at 0.5%. Illinois, with the most diverse economy in the region grew at 1.5%, while Michigan lagged at negative -1.2%. Nationally growth advanced by 2.0%.

Lessons for small companies, if you sell in or to particular regions or states, you must prepare forecasts and plans for the particular economic trends in the areas where you make most of your sales. Accountants can assist you planning efforts, but you and your financial staff must do the hard work of forecasting. Accurate planning assists your relationships with lenders and other investors. I can help you adjust spending, and if you can't make your revenues you must be prepared to cut elsewhere.

On the flip side, locate the areas that are growing more and target these markets. Long term trends don't lie, and they may save your business if you plan for them.

Sellers Beware

Selling a business? Volume is down according to the linked NY Times article. It quotes a recent study saying that only 10.5%, or a bit more than one in ten, of companies that are listed by selling brokers actually are sold. The article further notes,

"The main reason (for the low percentage), Mr. Vescio and others said, was that “most small business owners keep bad records,” so buyers cannot get an accurate financial picture."

Take heed, get a part-time accountant or Treasurer and keep good financial records. Get organized and stay that way, you won't regret it.

The Notion of Markup

A retail pricing concept that I have seen used in manufacturing and distribution companies as well, but can be misunderstood, is that of markup. As excerpted by Entrepreneur online, the author Ronald Bond notes that a standard "markup" for retail products is 50%. That is a retailer will double the price he paid for a product, ergo a bottle of rum bought in bulk by a liquor store at $12 per bottle would in this case go on the shelves for $24.

Now, you say, wait a minute, that's a 100% increase. So it is, but it's a 50% markup to the retailer. Why is this standard and justified? Because retailers have costs beyond their direct purchase price. There is rent, insurance, salaries, benefits, heating, lighting, etc. It's a good rule of thumb to consider when selling at retail and this 50% usually results in a net profit margin for the business of 5%-10%.

As a rule it's wise to avoid discussions of markup with your customers, what they need to understand is that you price your offerings to sustain a viable business, and if value meets or exceeds the price they won't care anyway.