Taking baby steps – a strategy to overcome disaster

pic courtesy of imageafter.com

Here is a familiar story. A good and profitable business sees a potential threat become reality and turnover falls suddenly. The former comfortable profit becomes a monthly loss.

The first imperative is to stop losing money which means that there must be more gross profit or lower expenses or both. Surprisingly tiny, almost insignificant changes will stop the company losing money. It’s the practice of taking baby steps instead of giant leaps.

For example: A business turns over of R1M per month before the crisis at a gross margin of 40% with operating expenses of R350K per month, leaving a net of R50K per month. To simplify the accounting this article will look at profit per month, as if this was a cash business and ignore tax. Say turnover shrinks by 20% after the disaster strikes, and the profit turns to a loss of R30K per month.

If, instead of making radical changes or retrenching staff, the company implements a careful strategy of tweaking several factors the loss can be eliminated without major change. For instance if the company achieves a 1.5% reduction in the cost of sale, a 2.5% reduction in operating expenses, a 1% increase in real prices and an increase in sales of 2% it breaks even!

It sounds almost too good to be true although it is – but is it practical? Let’s examine the components:

• A 1.5% reduction in the cost of sales is the easiest to achieve. Improving quality alone could do that, with reduced scrap and rework, fewer wrong deliveries and invoices and lower warranty claims. Managing inventories better will help too. The entrepreneur should approach his suppliers with a guarantee of prompt payment and secure orders in return for a tiny cost concession.
• The 2.5% reduction in operating expenses? First talk to the staff. Explain the plans and tell them their jobs are safe. Then ask them to save 1.5% of expenses. There is nothing like an enthusiastic staff wanting to help and secure in their jobs. The entrepreneur manages the other 1% by efficiencies like shopping around for printing, insurance and IT services and not doing wasteful things like paying for services that are no longer in use.
• How about a 1% increase in price? In a downturn? First talk to customers, tell them that quality and customer service will improve. Ask if they will accept a tiny increase on some products to guarantee this. Substantially increase the prices of all nuisance products to get decent margins or stop wasting resource on them. Refuse to accept the deduction of unearned settlement discounts. Withdraw from any price wars. Tweak prices to achieve the average 1% increase. As an aside – who ever heard of increasing prices by 1%? Stop thinking in terms of round numbers like 5%.
• And 2% additional turnover? The first step is to make sure that the salespeople don’t feel cheated, especially if they are on commission. It’s amazing how many businesses lower their forecasts but insist on the salespeople making quota based on the original higher forecast. Play fair with the salespeople; make sure they have a realistic chance of earning expected commission in return for a small increase in business. Put non- monetary incentives in place for new business. With increased quality, improved customer service, and motivated salespeople who are treated fairly you would have to bet on getting 2% increase in sales.

So how has the company done? It is no longer losing money, the customers are pleased with the higher quality, suppliers get prompt payment, and staff members are secure in their jobs and part of the solution. The sales force feels good and the owner has turned a very ugly situation around, with only minor adjustments to the business.

Now of course the business is only part way there – it has to get back to making profits. But right now it is in a stronger position to grab additional market share that it had been before the panic. A reasonable expectation would be that this energised and motivated business, with a secure supply chain and great self belief will make up their missing profit rapidly.

About Ed Hatton
Ed Hatton had a successful career in sales and marketing management in the IT industry before launching consulting company The Marketing Director almost 20 years ago. Ed is passionate about entrepreneurs and the need to develop the SME sector. He co-authored a textbook on Entrepreneurship and writes the advice column “Start Up Coach” for Entrepreneur Magazine.
More information is available here or send Ed an e-mail
About The Marketing Director
This consulting company advises and mentors small and medium enterprises with a particular focus on strategy, marketing and sales, and the inter-relationship between these disciplines. The company has been operational for almost 20 years and has consulted to a wide range of IT, manufacturing, services based, and distribution SMEs. The success ratio of client companies is far ahead of industry norms, meaning that clients of The Marketing Director are generally high flyers in their sectors, and survivors when other fail.
More information is available here, or by e-mail

©copyright  Ed Hatton. All rights reserved. You may republish this article or extracts from it provided you acknowledge me as the author and acknowledge my copyright.