We’d like to extend our sincere gratitude to Jim Counts of Counts Consulting, LLC for allowing us to post their previously published article. Permission granted VIA email 10/13/11. All articles are reprinted in their entirety as originally published.
Why Do Businesses Stop Growing?
A lot of things can affect the growth of a business, and we only have time to cover a few here. The number one reason recycling operations stop growing is lack of sellable inventory. Note, I said “sellable” since having a warehouse full of parts and a yard full of vehicles does not necessarily mean we have sellable inventory. There are still a lot of people who think the way to make more money is to keep the vehicles longer and longer in order to sell a few additional parts. Let me say here that you’re a lot better off having fresh vehicles that you are trying to sell a few hundred dollars more off old vehicles.
The number one reason people are not able to buy the inventory they need is they underestimate what the vehicles will produce in sales. The number two reason is because their overhead is entirely too high for the amount of sales they do. The number three reason is they run out of money, primarily because they do not keep payroll expenses in line with sales.
I think it’s fair to say that 90% of the recyclers in the U.S. and Canada do not know how much it costs them to process a vehicle completely through their organization or sell the average part. Without knowing these figures, we are doomed to buy vehicles which will never make a profit and miss buying the higher gross margin vehicles which could be very profitable. It’s not uncommon for me to see recyclers spend half of their day selling the parts which only make up 20% of their income. Obviously, there’s no way to make money throwing half of our resources at 20% of our income. This is an excellent example of what we do not know keeping us from growing.
Every time we hire an additional employee we reduce the amount of money available to buy fresh vehicles unless we are buying at least four times their payroll in additional sales. Every time we sell a part which costs us more in overhead to sell it then it creates in income, we reduce the amount of money available to buy fresh vehicles. Every time we sell a brokered part where the gross margin is less than it costs us to sell and deliver that part, we reduce the amount of money available to buy fresh vehicles. Then, when we have less money, we reduce the number of vehicles or the quality of the vehicles we buy. This is happening at the same time we are still paying for all of the payroll, equipment and expenses needed to process the vehicles we are not buying. This results in an additional reduction in the amount of money available to buy fresh vehicles. I described this as “circling the drain”. Each lap around the drain goes a little faster and faster and gets ever closer to the bottom.
Many of the businesses practices of the 80’s are still commonly used by recyclers without realizing that their cost of doing business and the cost of vehicles has made those practices both impractical and unprofitable. The only way out of this cycle is to change the way we do business. While the past makes a very good conversation topic, it does not assure us of making a profit.
We all know that if we buy extra inventory sales will go up. Does it not also make sense that if purchases go down, sales will too? This brings us back to the original point that a full warehouse and a yard full of old cars does not necessarily mean we have sellable inventory.
Almost a third of our sales come from the vehicles purchased in the last 30 days and 50% of our sales come from vehicles purchased in the last 90 days. If 30% of our sales come from what you bought last month, and we slow down on purchasing, does it not been make sense that you’re going to see a reduction in sales and profits very quickly.
Buying is the most important job in the company. Unfortunately, many recyclers decide what to buy and what to pay for the vehicles “when they get a minute” or “at the last minute”. I am yet to find a recycler who does not want to know how many dollars of sales we did today, yet how many of those same people know how many dollars worth of future sales we bought today. If sales are driven by purchases, shouldn’t we be more interested in what we have purchased than what we have sold?
Bottom line, the businesses stop growing because of the business practices of the company. This means we have to change our priorities, and way of thinking if we want the business to grow to the next level or to maintain the profits of the past.