This article was written by Steve LeFever, Chairman of Business Resource Services, Seattle, WA. While it was written with a “tough times” title, it seems like good advice for any time…
Profitability in tough times
Sub: start with the basics:
As today’s business economics get more and more difficult, wise business owners will take steps to make certain that they plan ways to reduce costs, find new revenue and operate more efficiently so they can remain profitable. To get started with this process, it is always a good idea to remember the basics.
1. Stay on top of your cash situation
Take time to prepare cash flow projections for the next 12 months and revise weekly if needed.
2. Know your key drivers and manage them
Keep a careful eye on areas that affect cash flow: accounts receivable collections and inventory turnover. How are you doing compared to past performance and your peers? Watch key areas that affect profits, net and gross margins, labor and fixed asset utilization
Over 97% of the people attending our workshops say they’ve substantially increased their under- standing of the health, strengths and weaknesses of their companies. Change the way you manage your business, increase your cash flow, and find profits you never knew existed.
3. Monitor Accounts Receivables closely
Process invoices immediately, distribute an outstanding accounts receivable statement weekly and take action on late accounts immediately. Start with a polite but firm personal call and don’t get off the phone without a commitment to a payment date. A few days improvement in collections will make a huge difference in cash flow.
4. Insist on good financial data
Accurate, timely financial statements are critical in tight economic times. Don’t accept excuses.
5. Get funding now!
The worst time to get financing is when you are about to run out of cash. Arrange for loans and lines of credit before you need it. Your cash flow projections from tip one will help you figure out how much you’ll need and when you can pay it back.
6. Review your long term financing
Are you financing long-term growth (or assets) with short-term funding such as a credit line? If so, see your banker about getting it changed.
7. Have good advisors and use them
Make sure you have a solid team of outside advisors, meet with them regularly and listen to what they say.
8. Don’t turn financial decisions over to others
There’s no need to turn yourself into a CPA, but you must be able to read financial statements, talk with financial people and assess your company’s performance.
9. Understand and use break-even analysis
Do you know your contribution margin? If not, you won’t know how much more you need in sales when costs rise or prices fall. At the same time you’ll know how much to cut when sales fall and analyze the need for expansion or capital decision.
10. Stay close to your clients
This will generate good will for you, give you a chance to spot new opportunities and provide an early warning in the event their industry isn’t doing well.
Ships are safest in harbors but that’s not what they’re made for. Don’t let fear of the future paralyze you now. Get moving and do something!