Revenue is vanity, profit is sanity. Or something like that - that's the old business adage which was recently regurgitated by Duncan Ballantyne in his top tips on surviving a recession.
Well whoever said it is right. There used to be a massive emphasis on revenue in the IT industry in particular with the theory that big was beautiful and that every new piece of revenue could be served by only a marginal increase in cost. In the Internet boom this was the mantra - get revenue, profit will come later.
Of course, we are all older and wiser now and we have realised that there is such a thing as bad business. Even in times of low interest rates, taking revenue at low margin puts a strain on the business. Increasing the margin on as many transactions as possible is a huge priority as it can help you survive.
So here are few thoughts on the subject:
1) Purchase smartly
If your business relies on buying in and reselling goods, then now is the time to go back to suppliers and negotiate hard - getting a few extra percentage points which can either be retained or shared with customers is vital to the bottom line. If the products are available from multiple sources, shop around or start to spread your buying according to the deals on offer. In the IT business, Distributors are always making offers or bundles, make sure you have access to all the information in a timely fashion to take advantage.
Ask Distributors what stock they have which has aged more than 3 months - often this is still viable and they will be in the process of writing the value down or willing to take offers. Make sure you have access to such information.
Compare prices and barter. Everyone is vying for your money and remember that. If month or quarter end is coming up, much bigger discounts will be on offer and sometimes extra credit - make sure you are wise to timing your major purchases to get the best deals.
Look for rebates if they are offered for loyalty which can be taken to the bottom line.
2) Keep stock levels down
Even though the cost of money is lower, having stock on your shelves is using up credit lines and bank loans - you need to have as much cash available to you as quickly as you can to be nimble and ready to take advantage. If you have already used up a credit line and need stock to fulfill an order, there can be nothing more frustrating. Most Distributors and Vendors are far more efficient at delivering so make sure you profile your stock down, decrease stock of slow moving goods and focus on the fast moving ones but decrease your holding anyway.
Sales may go down in this period and so stock days may rise very quickly - profile your stock everyday and take actions immediately and regularly as each day the stock does not move is another opportunity missed.
3) Think about Sales Commissions
In recessionary times sales are harder and can decrease to go under target. At this point assumptions on sales costs will come under pressure. Think about how you can be creative with commissions to accelerate reward for going over target and penalise for failing to meet certain thresholds.
4) Delivery and Logistics
The cost of delivering can be a big underlying cost if it is not fully passed on and a warehouse space unused is a drain on finances. Get creative - shop around for delivery methods, think about the number, weight and dimensions of shipments and profile what suppliers are offering. Think about consolidating shipments to big customers or lengthening delivery cycles to decrease small shipment consignments which can be more costly.
If you have spare warehouse capacity, think about how you can attract other local companies or vendors who might need to bond their stock and charge a nominal amount which can be used to offset.
Even look at outsourcing logistics and warehousing - there are tons of firms that do this that can offer greater capacity through peaks and troughs while you pay for only what you consume.
5) Marketing
Everyone tries to decrease marketing spend in times of recession which can become self defeating, so try to innovate and spend more wisely. The web now offers fantastic opportunities to drive more sales with relatively low cost marketing which can be analysed far more easily and comprehensively. Think about getting contractors or outsourcers involved who can help manage your marketing and take away the burden of peaks and troughs by not having to directly employ people.
6) Use the Web
The web is often a far more efficient and a lower cost method of transacting business by using ecommerce. There are some fantastic, simple methods to add ecommerce to your website and link it to an online catalogue which can rapidly move sales away from manual input to automated which can provide scope for efficiencies and cost savings. Many IT companies now have significant portions of their business online so reducing the need for order processing staff.
7) Use Contract Sales
Apart from gross margin, Sales and General Administration costs can be a large portion of cost of sale. Look to operate lean and mean and put the power where and where you need to - contract sales can help do this by paying relatively small retainers and high commission - you only really pay on results.
8) Focus on People
People are the biggest asset anytime but during a recession they are more valuable because they can help. By communicating early and fully, polling for ideas and inputs, your staff can become part of the solution. Look to get buy in for higher productivity, maybe deferred pay rises or less bonuses in the short term and the promise of higher later. Get them to audit each of their departments and think of low cost incentive ideas to motivate teams to identify cost savings and make them realisable.
9) Rebudget
Most SME companies budget once every 3 months maximum, and many just once a year. In a recession, the moment you sniff trouble, get onto the planning tools and reassess costs. Make sure that major investment decisions are reviewed thoroughly and staff recruitment is held over or delayed so that only the essential are taken on. If people leave, think long and hard about delaying replacement hires until you can see better conditions.
10) Recruitment Costs
Oh I could blog for days on recruitment costs - so many firms think they are just a cost line while others think you can pay peanuts and get good people. The fact is, the cost of bad recruitment is a huge drain on profits and while the figures look good nobody worries - in a recession it can kill.
First, review your suppliers and cut out companies that do not deliver. Second look at companies that are providing a Value Proposition that is realisable in actual monetary benefits - they need to be taking the burden of recruiting off your manager's shoulders while providing quality candidates at a fair price.
Negotiate performance related fees where possible - make sure these companies have 'skin in the game' by earning their fees when salespeople have stayed beyond a certain point or better still performed to a minimum standard. Don't accept clawbacks as they are hard to implement, deny the money up front. If they baulk, offer exclusive rights to certain recruitment in return.
It will soon sort out the wheat from the chaff, increase quality of recruitment, decrease time consumed in recruiting and give a focus on the ROI.
11) Currency Fluctuations
Many companies may purchase in foreign currencies and sell in pounds, vice versa or various combinations of currencies. It is an ever increasing risk to the cost line and is getting more complex. It is a hard pill to swallow, but it may be better to bite the bullet and trade in as few currencies as possible during a recession to decrease the liabilities. You may lose on one side but gain on the other and some times it is not easy to tell - keeping it simple helps you understand more. Talk to your bank about foreign currency accounts or buying currency ahead to hedge if you make lots of sales or purchases in foreign currencies.
12) Keep Assessing The Market
Many competitors will struggle in a recession as most customers will be reviewing costs and making harder purchasing decisions. Be prepared to move quickly when competitors stumble and take advantage. Make speculative offers to customers you do not deal with to test the water and be prepared to honour the deals. Look for parts of the market where competitors are having a good run and making money, very often such deals will be lock-ins at higher prices but with clauses for 'world class pricing' or 'benchmarking' - again make unsolicited offers; you have all to gain and little to lose.
13) Keep Reviewing
Don't stop once you have assessed your markets and margins, keep looking to make incremental savings and increases to margins whenever possible. Check all your customers are being charged the right price, you can never tell when mistakes are being made.
14) Work Hard
Once again, recessions are not for the lazy. Mobilisation of resources are key and slackers should be identified and properly dealt with. Don't tolerate inactivity and lethargy, it will hold back the good guys.
15) Innovate
Selling the same old items in the same old way may not be as appealing to customers in tougher times, particularly if they can easily be bought elsewhere. Now is the time to get creative and innovate - try to look at how a product can be 're-presented', 'repackaged' or 'presented as a specific solution' for recessionary times. You may want to make special services available designed to beat the recession like free audits or assessments or special finance options or bundles. Now is the time to position yourself to be more attractive in the recession and that requires a little thought.
16) Reviewing Sales Expenses
The odd breakfast under subsistence is neither here nor there but when salespeople travel unnecessarily or make the wrong choice over train or car, travel Business or First Class when Economy would be adequate, stay overnight when not necessary or use too higher class hotel, the costs soon mount up. Petrol costs are variable and if you pay mileage make sure you reflect current prices. Use audio, video and webconferencing where possible instead of face to face internal meetings and cut down on internal freebies like extended sales meetings. It isn't rocket science.
These ideas are not meant to be exhaustive but a stimulus for thought on how to increase margins without resort to vast costcutting measures - keep innovative and keep assessing, there are always opportunities to be a bit smarter.
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