How would your business cope with a 20-30 percent drop in turnover? How do business owners deal with the wave of economic uncertainty that’s reported on every day in the news, and decide what actions to take to survive and guide their business through (what we all hope will be) the inevitable upturn?
The best place to start is with your vision for the future. Picture in your mind’s eye how you want your business to look when the tough times are over and take only the steps that fit in with this vision for the future.
Cost management is the hot topic right now. If you are going to embark on cost management, it needs to be well thought out and planned. Slash and burn tactics in cost management can be more detrimental to the future of the business and may well be worse than doing nothing at all.
Tips for Successful Cost Management:
Efficiency, not just savings
Now is a great time to review processes in the business. Get your team together and ask those at the ‘coal face’ how you can do things more efficiently. You may get a big surprise at some of the great ideas that come out. Ask staff for their ideas for how to reduce costs and increase customer satisfaction, and reward the best performing ideas once implemented. Efficiencies should be measured not just by cost saving, but the impact they have on customers and other stakeholders in the business.
Example: A business that makes regular deliveries could offer less frequent deliveries in return for an incentive for lower pricing (ensuring this pricing is still profitable.)
It may be necessary to examine the fundamental business model (i.e. what exactly does the business do, what is its core activity and how does it achieve the outcome?). Over time, diversification can add complexity and not always improvement to the bottom line. There may be parts of the business you are keen to develop but they may not be contributing to profits. Decide if you should continue them.
Role of the Leader
Successful cost management needs to be driven by the leader of the business. The leader must demonstrate commitment and involve the whole team. Involving everyone helps give a sense of ownership and ‘buy in’ to the cost management exercise. The leader’s job is to cut through politics to ensure roadblocks, myths and resistance to change are managed effectively.
Focusing on future sustainability is the key to a successful cost management exercise. If you can inspire a culture of efficiency, you will create a very strong business to take advantage of the upturn. You could end up with a much stronger business than before the downturn. Look for one-off savings as well as long-term savings, as they may allow you to buy time to implement the overall plan.
Fostering an attitude of efficiency within the business requires communication. The plan needs to be communicated as well as reports on progress, and especially big wins. Wins should be celebrated and staff should be rewarded for these.
Treat cost management separate to your day-to-day business functions
The efficiency exercise needs to be treated as separate from the normal business function. Someone needs to be ‘in charge’, and the person in charge needs to be empowered by the leader to make the changes necessary. The leader also needs to make time in their schedule to work on the exercise. It may even be worthwhile to remove those in charge from their everyday job. You may need to invest some money to save even more money.
Control it and report on it
The leader needs to work on the whole plan and with the various divisions to implement changes and ensure there is no negative impact on customer satisfaction. Reporting regularly on the outcomes and initiatives will give the team the impetus to keep up the work.
If you don’t get team ‘buy in’, you’ll have an uphill battle. You may find good ‘change agents’ within the team and they need to be supported in their efforts. The team needs incentives based on efficiency and cost management. A good way to begin with team involvement could be to provide some financial training (i.e. give non-financial team members a basic understanding of profit and loss, and balance sheet issues).
Key Performance Indicators (KPIs) are also a great way to manage team involvement. You could have a brainstorming session to isolate the key drivers of performance in various areas of the business, and make these the KPIs for the team.
The target needs to be financial and budgeted for. Each team member needs a budget to work within. This will help to get them in the habit of acting within the new efficiency culture. If you can’t see savings on the bottom line the efficiencies probably didn’t work. One of the most expensive costs in business is money – look at ways to improve this to save on interest costs. Find ways to reduce the length of time customers take to pay – jobs are in progress prior to invoicing and stock is sitting on the shelf. Try to negotiate longer payment terms with suppliers and don’t pay early unless given a discount.
All of the above may sound like a lot of work and a whole new ‘ball game’ to anyone who hasn’t experienced the current economic climate before. My advice would be to draw up a summary plan, get started as soon as possible and involve your team in the plan. If outside help is needed, seek it quickly from a good financial manager.
Sue Hirst is a director of CAD Partners, a nation-wide mobile CFO “On-Call”/financial control/business accounting service for SME owners.
Photo: ArtemFinland (Flickr)