One of the most common afflictions I’ve seen in companies that get themselves into trouble, is that they do not understand their cost structure. In other words, they could be “shipping a dollar bill out with each order” and not even know it. In our consulting operation at Wharton Entrepreneurial Programs, a very common occurrence was for a client to come to us stating that they had a sales and marketing problem. The symptom was that they had very bad cash flow, and they immediately jumped to the conclusion that they were in that predicament because they weren’t selling enough product (or service). Very often, when we’d go in and do some basic analysis, we’d quickly realize that if we helped them with the problem they thought they had, we’d only accelerate their demise. The reality was that they did not understand the profitability of their products or their customers, so there was a real danger in just trying to sell more – what if by chance you started to sell a lot more of a particular product or service on which you were losing money with every sale – it could quickly put you out of business. They also often did not understand the concept of a break-even analysis and the difference between fixed costs and variable costs. Make sure you understand where your business is making money and where it is losing money; without this knowledge, you are trying to sail the entrepreneurial sea without the navigational equipment and data you need..
