What is your profit costing you?

Sound cost management makes cents

It is an annoying fact that when providers of services and products decide to increase prices they quote an increase in costs. The truth is that the buyer really does not care about this. What we are willing to pay, depends on… what we are willing to pay. How much it cost the other guy to produce or buy it, frankly does not come into the equation.

Simplistically speaking there are two things that affect your profits, namely revenue and cost. As, nowadays, we are not hearing that many growing revenue stories, especially from the smaller player, it should go without saying that these companies would be looking to cut costs. It doesn’t necessarily. Remember back in the early days of the “crisis” (it’s been going on too long to be called that)? Certain companies “rallied” and issued back-to-profit announcements. Because they fired several thousand consumers. The guys that consume what companies sell. With their salaries. Anyway, even though revenues were plummeting profits showed an increase, not due to multiplication or addition, but because of good old subtraction. It is true that in a healthy company costs should be coming down, but in smart ways, related to phrases and words like efficiency, economies of scale, purchasing power and others we read in books and stuff. Having said this, there are definitely cases in which people, regrettably, must go. But have we cut everything else possible before grabbing the axe?

So, what are you doing about your costs? Do you in fact know what they are or do you limit yourself to a few summary lines your accountant gives you? You need to understand, a) what your costs are and, b) which ones are driving your business. Anything that is not contributing must be rethought. Let me give you a somewhat extreme example. I walked into a ridiculously luxurious office suite. My first question to my associate was, “Bloody hell, Paul! Am I paying for all this?”. Especially in times of frugality and free fall, you need to be taking the oriental approach to value adding and non-value adding and drop the western grey “value enabling” crap. You see, Mr. Client, sitting on a 5K chair really inspires me to improve your customer experience.

By the way, if you don’t start with the blatantly obvious, you will suddenly find yourself doing the panic tango and firing people without having time to plan for the aftermath. And we all know that, especially in business, it take even more than two to tango. Rethink your spending based on value. Every cent saved is flowing to the bottom line.

 

Forecasting – wishful thinking or solid projection?

Never take growth for granted

It never ceases to amaze me how the simple basics of business get buried under the basic business of… business. OK, running a medium or even small operation is taxing and demands on the owner/manager or resource-starved manager are increasing month on month in this environment of “more with less”. Having said this, would you go ahead and order the catering before you know how many wedding guest there will be? Surprisingly enough many, otherwise competent, managers fall into the trap of running around after the day-to-day and letting the important stuff like planning and forecasting become permanently assigned to the back-burner. Some people like to give the impression of always being on the move, always being active. Chickens, given the appropriate yard space can run circles around any athlete. They are extremely active and energetic. But are they very productive or efficient?

Are you buying into the self projected myth that you are too busy? Too busy to see if you are going to have enough revenue and profit this (or next year) to pay your suppliers and staff?

Any manager worth his or her salary should spend a considerable amount of their time on the numbers. Depending on the time frame of delivery of your offering you should have your forecast and check your actuals against it daily, weekly, monthly etc. Then if you see that the actual is deviating from the forecast you put into action the what-if scenaria which, of course have already been prepared. This process is especially relevant in the current economic reality.

Everybody has their own way of forecasting. There is an unlimited supply of relevant articles and publications. Do spend some time looking into this. There are also tools available that can make the non statistical manager’s life easier. BUT, don’t rely only on the math.

I have seen too many managers take a ball park approach along the lines of “Well, we need to grow around 5%”. Then they turn to the sales director and issue a directive in managerial macho-speak, “Make it happen, Jim”. The problem is compounded if Jim answers in the same lingo, “I’m on it, John”.

There are three components that make for a sound forecasting exercise:

First you need the mathematical bit. This is where you look at historical data and project into the required period (next year, next semester, next quarter whatever).

You can be very detailed and use complex tools or you can use a spreadsheet and somebody who knows how to work it. It depends on what you have available. In a rapidly changing environment, I find that trying to be accurate down to the finest detail is a waste of time. It’s like spending six hours drawing a chalk street-art masterpiece on the sidewalk next to a big puddle.

The second component is the intuitive bit. This is where you look at where the numbers are coming from. Never take anything for granted, especially growth. Remember, the more historical data you have (let’s say three or four years as anything logged before Lehman is probably irrelevant to the reports you are getting today) the easier it is to identify patterns and flukes. If there are flukes (outliers or outright liars) kill them. Disregard them. Unless you can repeat them (that once-off big deal with the ministry or whatever). Do spend some time looking at your ad hoc business. It’s pretty safe to assume that if your sales force is bringing in a relatively constant level of said, one could assume that they will continue to do so. Report ad hoc gains separately and spend some time on them. Some repeat cases simply have a smaller frequency (a company that uses you once every twenty months?).  Segment your customer base by industry, at least. What is going on in their industries? Are they beating the market or following suit? What lies ahead for their industry? Good old PEST analysis. Changes in legislation? Liberalisation? Elections? Change of Administration? War? What countries do they trade with? Then go and look at each customer individually. If you have a sales force, they should sit with you and discuss the validity of the mathematical validity of the forecast in relation to their clients. Then you can factor in the real life input and adjust upwards or downwards.

The third and most important component (possibly the least documented in regression analysis white papers) is realism and the ability to face brutal facts and take, if necessary, brutal steps. Once you taken the pain to arrive at a sound forecast, it is totally useless if you refuse to take into account what it is showing you. If it looks good, fine. Just don’t let the sales force get smug. If it looks bad, then you must make decisions. Is boosting the sales commissions and taking a firmer hand to the sales people enough to bridge the gap? If not, how serious is the short falling? If it is such that it makes your lower intestine feel uncomfortable (sort of a gut feeling) then you need to take a serious look at the other contributor to your profit: cost. But that’s another story.