The golden triangle – focus on costs as recession looms
The three underpinning principles of business, known as the Golden Triangle; marketing & sales, cash control and the staffing, should always be at the forefront of a business owners mind, but when times are good, as they have been, complacency sets in. But now as a recession looms, I urge you to review the three golden principles. The anticipated sales pipeline is the raw data for deciding what to do with your business and it is fundamental that you understand what will happen to your portfolio of work. The secured work, and work in progress, is the only income you can be sure of. Assuming that cash collection is occurring when it should and you are achieving the maximum profit the market will bear, then it is wise to immediately review your costs for the next week, month and quarter and identify when cash will start to be consumed. You can then make plans to ensure that you do not start to haemorrhage vital cash reserves as projects complete.
Going into recession, the fatal mistake business owners make is not taking decisive action quick enough. They put off making the difficult decision to make cuts, which eats into the cash and invariably means that cuts later must be deeper and will impact upon the smooth running of the business.
The first thing to do is a line by line analysis of the invoices. Interrogate each one and see what can be either be not ordered again, reduced in the future, or changed for a cheaper alternative. Having done this exercise, all sorts will be highlighted, from the consumption of office consumables to express deliveries where people have been disorganised. There will invariably be wasteful costs occurring, unless you have someone who has a tight reign over expenditure. Cut the waste and make sure that there are processes put in place to avoid them creeping back in. Often, people see cutting marketing and training as a saving, but these are fundamental to the smooth running of the business and cutting these will be detrimental to the level of incoming work and efficiency.
Next is a more difficult issue, especially in small close-knit businesses, and that is reducing the cost of staff. Often, the instinct is to keep people who are versatile and can cover several roles, even though they may be more highly paid. In exchange for versatility, productivity will suffer as a person switches from job to job and their motivation may be compromised carrying out tasks which are not challenging. Whilst the person may appreciate keeping a job, it is not the way to manage the business and prepare for when times improve. The better option is to consider the projected income and design an ideal organisation structure for that. Then appoint the best people to the roles. This will mean some people are retained, some retrained, some recruited, and some will be released. The net effect should be the saving required to accommodate the projected reduction in income. A clinical approach to this is fairest for everyone and allow the business to regroup and grow in the future when times improve.
The cut in staff is best done once, so everyone can regroup and move on. Doing multiple cuts is like a death by a thousand cuts, and merely unsettles staff, who will leave if another opportunity arises, or become demotivated, by the lack of management clarity.
Finally, depending upon when you consider there will be some return to normality, the final costs to look at are the ones which take a long time to change. The fixed cost of premises can be a burden as income reduces. Look at any break clauses and ensure that you do not miss giving notice at the right time, if you decide you need to scale back on premises costs.
Everyone believes that they are efficient, but with a looming recession, no stone should be left unturned when examining costs, otherwise any reserve will be eaten into and the profit available to invest will be reduced.
If you would like an outside party to challenge your costs and assist with implementing a savings program, please contact me to discuss.
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Other blogs in the Golden Triangle series: