If you’ve struggled with running your business during this economic downturn or maintaining profitability, I’m sure you know – you’re not alone.
In fact, every day, I work with business owners and CEOs to overcome these issues. We put systems and strategies in place to help them achieve their financial goals and ensure their businesses’ survival and stability.
Over the years of being in charge of many businesses’ financials, I learnt that there are methods you can use to ensure that your business comes out stronger from these difficult times.
And two of them I’ll discuss in this article.
Not a long time ago, during our monthly financial meeting, one of my clients refused to spend time reviewing his monthly financial statements and past financial performance of his company.
In his words: “ This is a waste of time. I know that the real value is to be forward-looking!”
What can I say – he’s got the point!
Forward-looking tools in financial management add an amazing value, and it seems that many business owners are starting to appreciate them even more in the current climate.
(Although I’m not saying that you shouldn’t be reviewing your historical data, but that’s for another time!)
A great benefit of forecasting and financial projections is that you can create what-if scenarios and see how your business decisions will impact your bottom line and your business performance.
You can PREPARE yourself in advance for what might happen!
Furthermore – you can use your forecasting process to identify opportunities that will help you drive your business forward!
Below you’ll find two practical exercises you can carry out while looking at your projections, to add some extra money in your bank account in the coming weeks or even days!
1. Perform a profitability assessment of your services and/or products
This tip is not necessarily about improving your profitability straight away but about understanding where exactly you’re losing money.
In good times companies may focus less on identifying areas that are underperforming because rising profits tend to hide loss-making products and services.
So we don’t pay enough attention to it.
However, in a down economy, it becomes much more critical to identify underperformers and understand why certain customers or certain products might be costing you too much!
If you offer multiple services or products in your business, it’s very likely some of them won’t produce enough profit.
So open an Excel spreadsheet and list how much you charge for each offer. Deduct the costs associated with it (cost of sale and direct labour costs) and calculate the gross profit and gross profit margin for each service/product.
Similarly, you can perform the same analysis per client. Simply calculate total sales per client and deduct the direct cost that you incurred to service them.
Consider the following questions during your review:
- What’s the gross profit margin of each product and service you sell?
- Do you need to review your pricing and how you’re delivering your services? Can you provide your service more efficiently?
- How much does it cost you to acquire a customer? How much does it cost to deliver your promise or product to a customer?
- What’s the lifetime value of a customer? How long are you able to keep your client? Do you get recurring engagements?
- Can you find a more efficient way of acquiring a customer?
Treat every service you offer (and every product that your company sells) as if it were a separate business. Does each one contribute to the profitability of your company?
The bottom line is that you must know if your products and services cost you more money than they’re generating. Keep only the offers and clients that generate profit.
It’s how you’ll be able to double down on what’s working in your business.
2. Create a plan for cost-saving opportunities
Just to be clear here – I’m not talking about cutting spending on coffees and alternative milk choices for your employees!
I’m talking about eliminating potential wastage and underutilised resources in your business.
According to the 2019 Intuit Cash Flow Survey, 69% of small business owners say they’ve been kept up at night by concerns about cash flow.
They’re usually caused by late payments and then COMPOUNDED with the costs of running a company.
In the current climate, cost management became a difficult and emotional topic, as many of us have been forced to make some tough decisions in this area.
With that in mind, I’ve listed a few steps you need to take to create your cost plan for the next few months so that you’re prepared for what might come:
- Carry out a line by line review of your costs and decide on a case by case basis – which of your expenses can be: postponed, reduced, renegotiated or removed? No matter the circumstances, this should be at least a quarterly task on your list!
- Do you have a lot of small, unnecessary expenses that just add up? It’s time to get into the nitty-gritty – and save some costs.
- Investigate the effectiveness and return on investment of your highest costs and see if they need to be eliminated.
- Before adding an expense in the future consider if this investment will:
- generate more sales
- free up your time so that you can concentrate on strategy and business growth
- move you towards your ultimate business goal.
Can you find ways to operate your business more efficiently (f.e. with automation, digitalisation, or restructure of departments)?
Reach out to us today and we will hep you improve the financial performance of your business in 30 days.