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The new base line

The new base line
pic courtesy of imageafter.com

pic courtesy of imageafter.com

In an economic downturn, as the world experienced recently, many small business owners react in peculiar ways. They will tell anyone who will listen about how bad times are while ignoring the depressing effect these words have. While they are usually skilled decision makers they often panic and retrench skilled staff, cut back on customer support and otherwise cut costs but have no plan to review these changes in the future. They avidly read case studies of businesses that have found a wonderful solution to their plummeting sales and therefore become recession proof; and then desperately try to find a similar ‘magic wand’ answer for their own business.

Some operate in the hope that the bad times are a temporary blip on an otherwise smooth growth path; an inconvenience which will disappear soon. They believe that at worst it may mean retrenching a few unwanted workers. They will prepare highly optimistic forecasts for the future, anticipating that ‘things will get better’ in a few weeks or months time.

A better way

There is a better way to weather these bad times. But first the small business owner has to face a few facts:

    •The bad times are not temporary; they are a serious and worldwide problem. Economists argue about the expected duration of the downturn, but boom times are unlikely to be back soon, favourable conditions may be years ahead. Business owners working on the expectation of a quick economic recovery could be in for nasty shocks.
    • Very few entrepreneurs will suddenly discover a magic solution which had not been thought of before. While it is smart to keep looking, relying on finding a magic wand could be business suicide.
    • Continually talking about how tough times are affects the morale of both staff and owners. It increases aversion to risk, paralyses innovation, strangles assertive competitive activity and kills growth initiatives.

Once these concepts have been absorbed, the owner needs to think carefully about what the company can sell in the next twelve months if the economic conditions remain as they are right now. He or she needs to test the sales projection by considering the source of business – existing customers, new business development, export or any other. Realism in putting down these numbers is crucial, unwarranted optimism could be very damaging. If there is reason to believe conditions will get even worse in the sector where the business operates then the sales figures should reflect that.

The new base line

This is the new base line, the forecast for the year ahead.

The next step is to prepare a revised business plan, one that that allows the company to make a sustainable profit from the new base line sales volume. Entrepreneurs will need to look at margins and prices and see where they can be increased even fractionally. The cost of selling must be scrutinized and minimal profit products and customers groups must be ruthlessly dealt with – eliminated or re-priced so they contribute adequate margins. Cost reducing products is crucial to boost margins, and of course the overheads will need close scrutiny to find savings. Quality must be improved to prevent losses from rework and customer dissatisfaction. The business may have to be reshaped or downsized significantly, but in many businesses there is enough slack to improve profitability without too much radical change, so long as it is tightly managed. Do not cut resources that affect customer service – you want all the sales you can get, and now is not the time to mess with delivery lead times by saving money on drivers for instance.

The Future

There will be a temptation to revise the turnover figure upwards at this stage, to avoid taking pain – entrepreneurs who do that would be fooling themselves. Make sure that sufficient profit is planned to sustain the business and the owners through the bad times.

Now the owners can stop talking about how bad things are – unless the business falls below the new base line! And the owners should remember to rejoice with their staff whenever the business goes above that line – even if the results now are well below where the business was six months ago.

With the luxury of knowing that the business, at its new base line, is sustainable and profitable the entrepreneur can focus their mind on how to take market share away from competitors and how to grow the markets in total. He or she can focus on creating new valuable products, services and customer groups. Think how powerful this mindset is compared to the competitor bemoaning the bad times – and what it will do for your business.

©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.

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