Modify Operations

Products and Services

business operations word on digital touch screenWhat you sell is the nuts and bolts of your business and you must keep this area running efficiently and securely. You cannot afford to under invest but similarly there are usually operational efficiencies to be found in how you manage your products and services.

i. Careful management of inventory levels will be needed as demand may decline and you could end up holding excess inventory, tying up much needed working capital end of the period

Inventory Turnover = cost of sales for the period /average of inventory at start of the period and end of the period
Inventory Days = 365 /inventory turnover

ii. A close look is also needed for R&D, Product Development and Business Development activities

Payback Period = the amount of time it takes for the initial upfront costs to be paid back. Pay back periods usually are several years so there is the following shorter-term alternative that may be more relevant in the current crisis.

Time to Break Even = the time it takes for the project to generate enough cash to be cash positive.

iii. Become best friends with your suppliers and communicate with them regularly

These people become first port of call if things get a bit tight and they react better if they know what might be coming rather than finding out when the problem has reached a critical point. There are two useful measures that you can use to monitor how the business is travelling in this regard.

Aged Payables Listing = typically payables are grouped into 30, 60, 90+ days but the key thing is that most suppliers count the days from the date of invoice, not end of the month of purchase.

Payable Turnover = total purchases for the period covering trade payables (including materials, supplies and any sub-contracted components) / average of accounts payable relating to these items at the beginning and end of the period.

Marketing and Sales

If products and services represent the nuts and bolts of the business, marketing and sales is the engine room that provides the drive for the business.

i. Review marketing expenditure closely but avoid the temptation to just cut this back

A business spends money on marketing in a number of ways and much of it appears in your profit and loss statement in areas other than advertising. It is important to get a handle on what you are spending on marketing so review all areas and aggregate these. Take a close look at printing and stationery, IT costs (for your web site), entertainment and any other line item where a marketing cost may be allocated.

ii. There are a number of activities that have little or no cost, but can add significantly to your marketing efforts.

  • Start a referral program (give anyone who sends you a customer a small gift such as a bottle of wine).
  • Develop a loyalty program (give something special to your long-standing and best customers).
  • Try getting some PR in your local media.

iii. Consider using online marketing as a substitute for traditional marketing

There is a major global trend to redirect marketing dollars into online channels. Online media spend is growing by around 30% pa and in many countries it is bigger than the spend on radio advertising.

  • Online channels provide significant targeted marketing opportunities
  • It is cheaper and very effective. Consider web sites, search engine optimization, electronic newsletters,
    electronic direct mail (eDM), blogs and so on.
  • Online marketing is quite measurable so you can modify working and what is not.

iv. Avoid the temptation to cut prices to get the sale

  • Cutting prices cuts profits and you need profits to generate cash. The only circumstance when discounting is justified is if you have a serious cash crisis and you need to liquidate inventory simply to get cash flow in.
  • Look at offering payment terms (within reason), bundling other products, extending warranties and other price maintenance measures.
  • It is easy to drop prices and hard to get them back up again.

Systems and Processes

Your business should work like a well-oiled machine and this comes down to having the right systems and processes in place.

i. Adopt new technology platforms particularly web based tools

With the rapid adoption of new technology (particularly new web solutions) opportunities exist for cost savings across the whole business.

ii. Information Technology

There are many rules that businesses adopt regarding spend on IT. At the end of the day investment in IT should either increase revenues, reduce costs, increase customer service or increase productivity.

iii. Look for increased internal efficiencies

There is always a smarter way to do something.

  • The challenge, normally, is in overcoming institutionalized behaviors. But necessity is the mother of invention and in a time of crisis people adopt a survival mentality, so the resistance to change is lower.
  • Run an ideas board and call for innovations from across the whole team. Most improvements do not involve processes that senior management are involved in, but rather they come from rank and file workers who operate at the coal face. This is a particularly good time to listen to the rank and file.

iv. Look for systemic failures

Every business has systems but many of these have developed in an ad hoc way. As the business grows the systems just absorb a greater load until they overload. Before systems actually fail they start to leak, and this means poorer productivity, poorer returns and missed profits.

Human Resources

Many businesses consider people their best asset and no business can get through a crisis without a committed team. Building such a team is a long-term exercise and if you haven’t been a good employer don’t be surprised if the team is less committed than you may want them to be. Here are a few areas to look at in managing your people.

i. Look at your human resource strategy

People costs represent a large proportion of the cost structure of most businesses.

  • Consider your recruitment activities and possibly look at contract or part time solutions. This may not be the best long-term solution but it gives you flexibility, a major weapon in tough times.

ii. Consider one-off bonuses instead of pay increases

Salary increases are forever – a one-off bonus payment keeps your operational expenditure at a lower level and will keep most people happy.

iii. Identify the ‘must keep’ amongst your people

Consider grading your people into A, B, C and D groups. The A people must be kept at all costs – they are critical to the current and future business and you need to make sure these people are kept happy.

iv. Communication to the team becomes more important now than ever

Water cooler discussions will inevitability turn to the viability of the business and people who are not in the know often jump to conclusions.

  • You do not have to reveal financial information (although many businesses do these days), but communicate regularly to the team. People are very understanding and if the picture is presented to them they should be more receptive to salary freezes and other efficiency measures you may introduce.

 

Three steps for managing through a financial crisis: Your Valuable Formula, Modify Operations, and Manage for Cash.