It is clear that in the current economic environment local businesses are feeling the pinch.
These are certainly difficult times, but how can businesses not only manage their profitability, but also seize new opportunities? Here are our top four tips to flourish in the recession.
Making the Sale
The obvious place to start is with the top line and while customers will typically become more price sensitive during a recession this does not necessarily mean discounting prices will translate into increased sales or profits. This is particularly true if implemented in conjunction with a cost cutting strategy which decreases advertising and marketing.
Let's consider a business with a GP of 30% that decided to reduce price by 10% - a seemingly insignificant reduction. However, the company will require a 50% increase in sales just to maintain their gross profit. On the flipside, a company can sustain a 33% drop in sales at their original GP of 30% before being in a worse position than if they had dropped the price.
Status quo 10% price decrease same volume 10% price decrease volume increase No price change volume decrease
- Sales 100 90 136 67
- COGS 70 70 106 47
- Gross Profit 30 20 30 20
- Gross Margin 30% 22% 22% 30%
Remember, pricing is very transparent as a competitive advantage and one easily copied by competitors, so what other strategies could be implemented to keep sales moving?
- Consider ways of offering a lower priced alternative to your price sensitive customers while still maintaining margins.
- Margins may vary significantly across products - knowing these will allow you to implement an effective pricing structure and focus on the areas of your business that are most profitable.
- Building an efficient sales teams, sales processes, sales activities and channels are also key revenue drivers.
You've got to Spend Money to Make Money
Cutting expenses seems like another obvious place to start when times get tough but this is not always in your best interests. Discretionary expenses include all costs which are not absolutely required for the business to run, and would include items such as research and development, training, marketing, customer service initiatives and entertainment.
You should not cut any expenses which will impact the strength of relationships with profitable customers, nor any investment in developing or delivering profitable goods or services. This includes marketing and advertising.
A key step to managing expenses is conducting an analysis of customer and product line profitability, then reviewing on a case by case basis.
This may be a good time to seek out alternative suppliers who can offer goods or services at a better price, although be wary of compromising quality if this forms part of your competitive advantage.
There are two key components in managing your assets; developing good debt to equity structures, and managing cash and working capital.
It is a common fault for businesses to weight too much debt to the short term, while long term secured loans invariably carry a lower interest rate. Reviewing your financing arrangements may allow you to decrease your interest expense, or if cashflow is tight allow you to consider the possibility a period of interest only repayments.
Managing cashflow has become one of the key issues for businesses particularly when exasperated by decreasing sales and slowing debtor days. Receivables and inventory are key in improving your cash cycle and monitoring these area's closely will ensure not only that cashflow is optimized, but also that stock is available to meet customer needs. Cashflow optimization will decrease the need for short term funding, and hence cost of capital.
And a final point to note, good staff are one of the key assets to any business, recession or no recession. Look after them.
Be the Man (or Woman) with a Plan
Having a clear vision, strategic plan and business plan, and reviewing these regularly are a must for any successful business. Recession or not it is important to clearly define and monitor your company strategy, but when business is failing it becomes even easier to loose sight of you original vision when day to day focus turns to short term survival.
Take active steps to understand the current situation, and what you need to do to survive, then build this into you plan. Does your business model need to change for a recessionary market? Develop agile and resilient strategies and stick to them - remember, in a recession your value proposition does not change, just how you bring it to market.
Back up your plan with clear, consistent and transparent performance measures and KPIs and a financial forecast mod
Posted on Tue, 1 May 2012
by Shawn O'Grady