SPECIAL REPORT

 

How to Turn Difficult Economic Times into a Time of Great Opportunity

Too often people focus on the negative rather than the positive.

All we hear at the moment is bad economic news. Sure, things will turn around, but when? Nobody can say for certain.

But as a Business Owner, what can you do when things get difficult?

In good times, virtually anyone can run a successful business and many will even be in great shape. But good times hide from view the real weaknesses that exist in so many businesses and they also hide from view underlying strengths. When the going gets tough, both the strengths and weaknesses are revealed.

An economic downturn is a time when the business landscape is cleansed. It’s a time in the economic cycle that presents you with an opportunity to lay the groundwork to build your bottom line (net profits) by addressing the things you should have been doing right irrespective of economic conditions. For an already well run business, it is a time for them to drive home their advantage by focusing even harder on the things that have made them successful.

We have listed below our thoughts about how you can do this. Also, we have an ACTION PLAN for you at the bottom of this e-mail!

Your Pricing Strategy

Many business owners have the mistaken belief that revenue is the major profit driver and a price reduction enables you to hold or even grow market share and thereby maintain profitability. It isn’t that simple.

It’s fair to say that typically customers do become more price sensitive during an economic downturn but not as much as many business people think. However, rather than drop your price it is far smarter to explore ways to introduce a lower priced alternative to your main service or product with some “value” removed. In other words, maintain your margin on your main lines and introduce a lower priced alternative to service your price sensitive customers. In other words, give your customers two opportunities to say ‘yes’ instead of either ‘yes’ or ‘no’.

Our view is do not consider a discounting strategy unless you can introduce an additional lower priced alternative or you have a cost advantage over your competitors and you have available capacity and the demand for the product or service you offer is sensitive to price.

Because price cutting is so transparent, it is by far and away the easiest initiative for competitors to copy, so the minute you do it you not only lose margin on all your sales but you’ll probably lose some of your physical volume as well. At the end of the day, the game of business is about the bottom line (Net Profit), not the top line (Revenue).

It is interesting to calculate the impact that a price reduction has on the need for additional sales to maintain gross profit. For example, if your GP% is 30% a price reduction of 10% (a common discount used) will require a 50% increase in sales volume to maintain your gross profit (it’s even higher than this if your GP% is less than 30%). Quite frankly, it would be amazing to achieve a 50% increase in sales from a 10% price reduction during an economic boom but this would be almost impossible to achieve in an economic downturn.

So if price is not the answer, what is?

Identify your very best customers and your most profitable products and/or services then focus your attention on both of those elements of your business. If you do a thorough analysis of your customer base, you will inevitably find that between 10–30% are unprofitable for you.

A great starting point for this is to do a Pareto Analysis that will tell you what percentage of your customers contribute 80% of your revenue and a separate analysis of the percentage that contributes 80% of your gross profit. Get rid of the low profit contributors or allow your competitors, who are implementing a price reduction strategy, to “win” them.

You’ll benefit in two ways: first, your immediate profitability will improve because you are generating quality revenue by ridding yourself of unprofitable business and secondly, you’ll ultimately gain market share when your competitors go out of business as a consequence of them trying to service your bad customers on their lower margins.

Strengthen your Balance Sheet

Many businesses get away with murder in good times. They have too much debt that is incorrectly balanced (e.g. too heavily weighted to the short term), their shareholder distributions (drawings) are too high and their receivables and inventory are poorly managed.

This is a time to clean all of these things up. Dispose of unused or under-utilised assets (and under-performing non-core businesses) and if those assets are required for some aspect of your operations, out-source that service. Even if this ends up costing you a little more, the benefits you will get are some debt retirement (assuming the proceeds for the sale of the assets are used for that purpose) and secondly, a reduction in your break-even point (assuming the increase in variable costs does not outweigh the effect of the reduction in fixed costs) which gives you more capacity to deal with sales volume fluctuations.

Improve the quality of your Financial Reporting and Financial Management Processes

In boom conditions people don’t worry too much about the quality of either their financial reporting system or their financial management. As long as there’s money in the bank to pay the bills everything’s OK. Unfortunately when these bad habits spill over into difficult economic times, you have a recipe for disaster.

You should have a full set of Financial Statements prepared that are accurate and available within 3–7 days of the end of each month. A monthly review meeting with your SBS Accountant, reviewing the KPI’s (Key Performance Indicators) of your business in a special Graphical Report, can make a dramatic difference by helping you keep focused on the things that need to get done in your key result areas.

In addition, a weekly flash report should be available by close-of-business Friday that shows your sales, receivables, payables, cash, sales pipeline, orders on hand, your primary activity metric (e.g. transaction count) and average transaction value. The KPI’s will depend on the business but this is an indicative list.

Focus on your Core Business and supporting operational processes

Successful businesses have a laser-like focus on their core business. This is what makes them very good at it. In difficult times it often happens that people look for non-core activates to boost revenue which distracts them from their main business, confuses their customers and starves their principal activities of resources.

Our advice: stick to your knitting and concentrate on improving the productivity of your existing processes.

Don’t cut back on discretionary expenses without good reason

In tough times it’s normal to think we should cut expenses because with a gross margin of say 30% then for each $1 reduction in costs we do not need $3.33 in revenue. This is something that can’t be ignored because these numbers speak for themselves. But simply cutting any expense simply because it’s possible does not make sense even though that may appear to be intuitively correct.

A discretionary expense is one over which management has discretion in the sense of that it can be cut, increased or eliminated. Expenses that fall into this category would include R&D, team training, marketing, customer service initiatives, some team salaries and discretionary bonuses and so on. In contrast, non-discretionary expenses are those expenses in respect of which the business is either contractually obligated or are absolutely necessary to “keep the doors open.”

For the most part, discretionary expenses are associated with activities and initiatives that grow the business or to put that another way, they ensure the business will be vibrant tomorrow. In contrast, non-discretionary expenses are the ones that are associated with what the business must do to meet today’s operational needs.

Lazy (or ill-informed) business managers tend to look first at discretionary expenses when they launch a cost cutting exercise which is precisely why a business that is going to come out of an economic downturn stronger than its competitors always employs a different strategy. There are always some discretionary expenses that should be cut or eliminated (even in good times) e.g. business/first class air travel for short trips, long lunches and $100+ wine, chauffeured limos ? need I go on?

You should not cut any expenses that directly impact the strength of the relationship you have with your profitable customers. Nor should you cut the investment you’re making in developing and delivering your most profitable products and services. You will find that as a result of reducing your unprofitable products and purging your unprofitable customers you will have opportunity to reduce some of you non-discretionary expenses.

Keep your team in the loop

Your team are the key to your success. In an economic downturn people always worry about their job and the last thing you want is your best people jumping ship and joining a more successful business so that you’re left with under-performers.

Your people need to know what your strategy is and they need to feel confident that their job is not on the line. If they feel secure but at the same time realise that everyone has to pull his/her weight, you’ll find they’ll step up to the challenge and you’ll not only be able to grow your bottom line, you’ll build a stronger team that will remain loyal to you for many years to come. You’ll also position yourself nicely to bring on board people who have been retrenched by your competitors so you might want to pick the gems out of that to strengthen your team by letting go people who don’t want to roll up their sleeves and get behind you.

ACTION PLAN

As a valued client we urge you (if you haven’t already) to address the following issues –

• Cash Flow – Have your budgets and cash flows been adjusted to reflect the current environment?
• Profit - How will these factors affect the bottom line?
• Growth – How can Sales, Income and Margin be maintained and increased?
• Asset Protection – How can you protect our Asset Base?
• Succession – How can you exit the business, when the time comes, in the most advantageous way?

If you are finding the answers to any of the above questions difficult, we can help.

The Specialised Business Solutions Team have had many years of experience in providing successful independent professional business and planning advice to clients in all of the above areas. It is possible to sustain and grow your business even when the economic outlook is not optimistic.

Now is the time to plan for the future! We can’t change the past but we can change the future.

Please contact your SBS Accountant on (07) 3221 1100 or simply hit REPLY to this e-mail to arrange a meeting with us to discuss your concerns/needs.

Kind regards

THE SPECIALISED BUSINESS SOLUTIONS TEAM