By Marti Benjamin, MBA, Professional Certified Coach As individual consumers and businesses cut their spending in the tightening U.S. economy, the rip...
By Marti Benjamin, MBA, Professional Certified Coach
As individual consumers and businesses cut their spending in the tightening U.S. economy, the ripples are seen in an ever-widening circle. It is always sound business practice to spend wisely, but in times such as this, every dollar spent on your business must be productive—that dollar needs to generate at least $1.00 of value; any that are not, are a drain on your business and costing your profitability.
Here are some suggestions for identifying those non-productive dollars and plugging the drain on your resources.
Finding Non-Productive Dollars
It is difficult to save your way out of a revenue decline with small cost cutting measures like asking employees to bring their own pens and paper to work or to pay for their own coffee. That is the ‘nibbling around the edges’ approach and it often takes more effort to identify the small savings than they are worth. This type of cost-cutting often leaves employees and customers feeling undervalued and ultimately undermines motivation and engagement in the business just when it is most needed.
To locate non-productive dollars, begin first with your largest expense category.
¨ Where are there opportunities to reduce that expense category without compromising your business position? Look at this category with a beginner’s mind: if you were starting your business today, with all the knowledge you currently have, and a revenue projection equal to your current reality, how would you manage this expense category differently? What is stopping you from making this change now?
¨ Are there acceptable alternatives to the products/services you have been using that will produce equal outputs? If you have not evaluated your standard products/services within the past 12 months, it is time to do so. With new products and services entering the market so rapidly, an annual comparison of what you are using to what is now available may identify opportunities hiding behind old technology or procedures.
Take advantage of cost savings available, such as discounts and favorable payment terms.
¨ Is your supplier able to find other savings opportunities such as free delivery or shipping from a less costly point of origin?
¨ Have you evaluated the trade-offs between volume purchasing and storage of supplies and components?
¨ Does your trade, professional or business association (e.g., Chamber of Commerce) offer discounts to member businesses? If the discounts apply to products or services you require, compare the cost of membership to the savings and determine if the membership fee serves you.
Consider ways to share costs and leverage customer contacts with non-competing businesses (e.g., office space, shared staff, etc).
¨ If you are calling on the same customers, what is the opportunity for cross-selling?
¨ If you belong to a business leads group, what other members are addressing similar customer needs and how could you collaborate for greater impact with less cost to each of you?
¨ If you do not belong to a business leads group, have you considered the value in joining? For many businesses, this is a great way to extend your customer contacts as 10-40 other people are looking for customers for you while they are conducting their own business.
Products or services with declining demand may also be hiding a drain on dollars.
¨ How can the product be modified, promoted, produced or offered differently to increase demand? If you do not know, ask your ideal customer what challenges they are facing today. Resist the temptation to ask them how they like your product or how they would like you to change it. Learn about their challenges and solve their problems and then you will know the current value of your product in the eyes of the customer and you can modify or eliminate as indicated.
¨ At what level of demand will you eliminate the product or service from your offering? If you establish the threshold before you need to, you will be less emotional in deciding to let go of a product that is no longer valued in the eyes of your customer.
Examine the variable expense categories, those that should fluctuate with sales and revenue. This is one of the most difficult areas for small business owners to manage well; it often involves people and relationships that have meaning beyond the profitability of the company. Regardless, it is important to understand the impact, even if you decide not to reduce expenses in this area at this time.
Often there is a lag between a decline in sales and a corresponding reduction in expense because the expenses are not monitored carefully. Whether it is office supplies or labor expense, if sales activity and revenue are declining, the variable expenses that support sales must also show a reduction to maintain profitability. If you are not tracking revenue and expense by product or service line, this is a good time to implement such a system and identify which items contribute to profitability and which drain it.
Protecting the Productive Dollars
The key to understanding the difference between lazy and productive dollars is value; if the value returned in a key function of the business is greater than the money spent, that is productive. Use data, not just perception to determine whether dollars are lazy or productive.
Examine both the short-term and strategic value received for the dollar spent. If the value is returned in the long-term, consider this an investment and calculate the return over the appropriate period. Be as objective as possible in this assessment; use your business support team—your accountant, business coach, mentor—to make sure you are not seeing an investment where an expense actually exists, or vice versa.
Thinking Profitably
This is a time to use the rational side of your brain to identify alternatives and generate greater value. It is not the time to be driven by either panic or blind optimism. Thinking profitably means seeing the business as it is, strengths and challenges alike, and deliberately choosing the path to success.
Where are your non-productive dollars hiding?
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