Christmas Cheer
I was reading the Australian Financial Review this morning with my morning coffee and it was full of the usual looks at the past year, contained a few forecasts for 2009 and the obligatory survey of readers. One survey run by Sensis asked their survey sample (who ever they were) to indicate how they were going to handle the downturn. Interestingly 22 % said they were going to reduce costs, 11% were going employ fewer staff, 11% said advertise more (geee am i surprised this is amongst the results considering the company running the survey) and 6% said they were going to work harder and another 6% said they would manage better. No where in the results is the response that people will be making better use of the capital employed in their business. I guess it must be hidden in the manage better, work harder and reduce costs responses.
This article also provided advice on how to survive the looming (if it isn’t already here) economic crisis, particularly aimed at small business owners. I find it interesting to see what advice these financial gurus provide their readership. The usual and predictable suggestion of managing your cash flow better by watching your debtors, cut unnecessary spending and be aggressive with your marketing and pricing in an attempt to increase your market share. No where in this article is any suggestions as to what costs to reduce.
There was one suggestion of reducing the size of the business back to a manageable size thereby reducing your debt and working capital required. The trouble I see here is the business has entrenched habits and practices that have been developed to support the level of debt and capital employed - there is severe risk in quickly cutting back. In most cases the first major expense businesses look at cutting is staff. The risk here is the high chance you will lose important knowledge which is much more costly to replace when you realise you don’t have the capability you thought you did have. There is no advice in these articles about how to make better use of capital save cursory suggestions to lower inventory. As Homer Simpson says “Doh”, the key is in how and what inventory. The key is in having the business systems in place to ensure that inventory doesn’t get out of control and unresponsive to demand in the first place.
Those companies that have implemented these business systems prior to these hard times, that is were disciplined enough to be prudent in the good times will be well placed now that times are getting harder. The lowering of the oil price and other economic indicators is clearly signalling that NOW is the time (if you haven’t already) to establish these business systems and get ready to profit form the more difficult trading conditions. It is actually possible with your competitors battling the same conditions without such systems in place that now has the possibility of actually being the best of times for you, by profiting from their difficulties.
The key finding for me from that survey is that over 60% of respondents were going to take actions that didn’t involve looking at their business processes. You will recall in my last post I spoke about the profit equation, this is an ideal place to start, not at reducing silly things like cutting back on the company biscuits, the quality of coffee you provide your staff or on not replacing light bulbs when they need to be replaced or other such cost cutting schemes you see put in place when times are difficult. Have a look at the businesses day to day habits. A habit of turning off a light when it isn’t needed, so the wasted costs are not there in the first place. Silly example I grant you, however I see company after company cut back on the silliest things. They would be better off applying the 80/20 rule and examine those habits that will have the biggest impact. In tough times you need quick wins to give you breathing space and (in my opinion) this does not mean cutting staff. This is most cases is where your best cost cutting ideas will come from.
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