Small Steps to Big Rewards

As we continue to weather the current economic crisis that has been affecting us all, it reminds us to take a deeper look at our businesses and how we conduct things on a day to day basis. Especially during these times, businesses need to be proactive with their management and are making the correct decisions to ride out the storm. We all require the correct tools to make those decisions.

Here are a few examples of small steps that businesses can take to generate big rewards in tough times.

Cash is King: Many of us have heard this statement before, however it rings very true in today’s market. Even in good times, profitable companies can go out of business due to a lack of cash. One solution is to develop a cash flow forecast. This can be an eye-opening experience that will help alert the business of pending concerns. In this type of economy, customers are slower to pay, which can place large demands on a company’s cash. Being able to forecast this and have strategic plans in place to navigate during these downturns is the key to survival. A great example is the contrast between two people. The first is the person who foresaw a pending cash crisis and arranged for a low interest loan to help them get through a difficult period. By planning ahead, they are able to have a low-cost, high success plan in place. On the flip side is the other person, who did not plan, is in a cash crunch and now finds themselves standing in line at the local check cashing store paying extremely high fees for an extremely short term solution. Remember that banks are great at helping out when times are good, but not as helpful when a business is struggling. Thus waiting until the business hits a difficult stretch to look for cash flow solutions from their bank typically leaves a company with little options. The cash planning needs to happen when things are going well so that a company is prepared when things become more difficult. Having good ongoing cash forecasts allows businesses to formulate the best strategies during good and difficult times.

Know what segments are profitable: It is surprising to hear how many businesses do not know which segments of their business are the most profitable. Businesses need to protect the higher margin components of their business and know where to focus their limited resources. As markets tighten, customers become much more discerning in their decisions and are taking the time to do additional research and legwork prior to choosing a vendor. This has led to businesses now being required to spend more time trying to land new customers. Knowing where to spend that extra time is now extremely critical. If a business has one line that nets a gross profit of 20% and another that nets 8% and each require the same amount of time, it is obvious which line they should work on – the more profitable one. If a company does not know which segment is more profitable, an informed decision is not possible. It might also be the time to look at shutting down those unprofitable segments that have been dragging down the overall numbers. If a business doesn’t analyze each department, how do they make the right choices?

Mange in real-time: Too often, businesses react to information two to three weeks after month-end. Reacting to changes in this business environment requires timely information for gross margin management, product line profitability analysis and administrative cost controls. With today’s computer systems, data can be collected and reported on a daily basis, allowing management the ability to react in real-time to deteriorating gross margins or unexpected market changes. Businesses need to know the condition of their financial statements at all times (ie - accrual vs. cash method vs. cash flow analysis).

By applying some of these strategies, business can ensure that they have the financial strength to navigate through the choppy waters of today’s business climate.