The power of 3 concept was originally adopted by major, Fortune 500 companies, and can be
implemented at the small business level in order to increase profitability.
Most small business owners don’t understand the different between profits and cash flow.
Here are some alarming statistics from SBA.gov:
• 93% of small businesses manage their business from their bank account.
• 90% of small businesses that close were profitable but mismanaged their cash flow.
• 46% of small business fail from lack of pricing strategy, nonpayment of taxes, poor recording
keeping and excess expenses.
Profit is not cash flow. There may be cash in your accounts, but that may belong to payables. Rather
than cash available, it’s important to keep in mind that receivables are what’s contributing to your
Profit and Loss Statements
Your P&Ls help predict your profit and cash flow months in advance. These provide a scorecard for what
happened that month, and should also show year-to-date performance. To track the health of your
business it’s important to look at 3 KPIs (key performance indicators).
• Cost of Goods
• DSO (Daily Sales Out)
Example: Say you have $30,000 of receivables and an average of $1,500 in sales per day. Your DSO
would be 1 month of Monday-Friday sales, which translates to a DSO of 20 days.
A great DSO is usually 17-18 daily sales out. If you are over 45 days out, you’ll have a lower chance of
collecting your receivables.
So what is Power of 3?
The power of 3 ultimately boils down to these three rules:
• Increase your price by 3%, decrease your cost of goods by 3%.
• Increase your production by 3%, decrease the hours worked by 3%
• Increase efficiencies and decrease fixed expenses by 3%
Actual Xendoo client results example.
By increasing the prices by 3% and decreasing the costs of goods by 3%, this client exponentially increased their profitability by 36%.
Many businesses are hesitant to increase their prices. Here is an example that may help quell concern.
Say you go and buy a bottle of water. Instead of buying the water for $1.00, it’s $1.03. Your customers will not walk out, and more than likely it’s not even noticeable.
In the client example above, the sporting goods retailer had an average ticket of $30. After the 3% increase, this resulted in an average ticket of $30.90. Most customers will not even recognize this price increase.
In order for this to work exponentially, this should be done in tandem with decreasing costs.
In our example above, the sporting goods retailer was not tracking inventory. They were purchasing last minute and not forecasting sales. After better educating the client on their cash, they were able to take advantage of manufacturer deals. Similar to retailers, manufacturers and wholesalers also offer sales and discontinued pricing. By understanding their cash flow versus profitability it allowed them to take advantage of new purchasing behavior which led to a decrease in costs of over 3%.
Shipping alone can bring down cost of goods by 3%. For example, instead of choosing 2ndday, order it with ground shipping.