The Oregon Business Coach

When revenues do not support the business expenses, what are the tools that can be used to bring them back into line?

The traditional tool, used by businesses large and small, is to reduce labor expense. In a good economy with most businesses doing well, this option works. It is unpleasant for those laid off, but in a good economy the economic hardship is short lived. As we've already discussed when the economy is poor and many businesses are laying off, hardship becomes long term and can become institutionalized.

Are there alternatives?

In most businesses, employee costs represent the only major variable in the profit and loss equation that can be "adjusted" with speed to adjust expenses to revenues. Unfortunately, the cost of labor is not a large fraction of the expense of most business operations. As a result, making up for a small percentage short fall in revenue requires a large change in labor expense if all other factors are held constant. I expect that you already recognize this! :-)

A better first choice--

An associate reminded me this week that renegotiating expenses is always an option. In today's competitive market everything from your insurance to your rent is negotiable. You should also make sure that you are not paying for product or services you don't need, or did not authorize (check your phone bill, seriously!) One retailer found they were paying for more space than the store actually had.

There is also an important relationship between how long product is on the shelf before being sold, and the profit each sale must produce. Put your capital investment into stocking items that sell quickly, and recover your investment in those that do not!

Tackling labor expense

Several things can be done to reduce labor expense-- Reduced work weeks, denying overtime, use of natural attrition.  Some manufacturing companies have used shutdown weeks, which can be effective.  I have seen companies ask employees to take time off and the like; however while this might make corporate liabilities look better, it has absolutely no impact on cash flow, which IMAO is the only justification for adjusting labor costs in this way. (If there is a permanent drop in the demand for your product because it has become obsolete, then RIFs may need to be considered more seriously...)

Address fixed expenses

An avenue that is rarely pursued is to address the other fixed costs and liabilities of operation-- by selling off facilities, selling machinery, renegotiating contracts with external suppliers and unions. These are rarely approached because there may be legal penalties for withdrawal from a contract, or impact on reputation, and a reduction in hard assets owned by the business.  Often, one will have to sell assets for less than their book value because you are selling at a disadvantage. None the less, while the business was in its growth cycle you would have purchased new capacity as needed to grow with demand; as demand subsides the reverse must occur. Human psychology resists this approach.

Bring purchased services inhouse

I would also look at every outsourced service used by the company--Can the function be brought in house and can it be done by employees moved from other areas (even if some retraining would be required)?  Even if the resulting organization is not as "efficient" as outsourcing was, the effect on employee morale can be significant.

Adjust your market price model

Another move is even more gutsy--adopt survival mode pricing and accept very low (or even negative) profit margins. The goal is to increase sales volume and at least cover the expense of maintaining the company as a player. In highly leveraged companies profitability is very sensitive to volume and increasing sales volume by fractions of a percent can result in profitability changes of a dozen fold or more. Company executives and board members need to be prepared to stand up to share holders to explain what's going on for this to work.

Focus on creating an economic advantage

Two other factors--there need to be ongoing efforts and investments in lowering operational costs, and a willingness to flexibly adapt to lower expense (measured as better cash flow) ways of production. Note that expense, price, sales volume, revenue, profit, and cash flow are all related but that the relationship is complex--increased revenues do not imply improved profit and improved profit does not imply cash flow.

Keep marketing budget but make it work harder

Finally, most businesses reduce their marketing budgets during hard times.  That may not be the best decision--The real question should be which marketing is effective and which is not (on a campaign by campaign basis) and money should be funneled to campaigns that work and withdrawn from those that do not. Any marketing that does not have a traceable ROI is suspect. Keeping marketing working effectively is important because there is a multiplier effect on dollars spent above a certain threshold.  If marketing efforts fall below some minimum point, marketing dollars become quite ineffective.

Employee acceptance is a key factor

I personally think it is pretty important to involve employees (in addition to executives) in the process of figuring out what to do. It will be easier to accept hard decisions if it isn't just coming from highly paid executives. Employee involvement needs to be genuine. There could also be self managed SWAT teams created for areas of the company to look for ways to reduce expenses in ways that let the company to work well. If the employees on the teams are well respected and if they listen to their coworkers, there is lots of opportunity for great results.

Your duty to your employees

Some people will be surprised by the idea that executives and managers have a duty to their employees. After all, they are compensated for their work aren't they? The fact is that a pay check is not enough. Employees often structure their lives around the needs of their employer, adjusting family life to work schedules, getting education to match work demands, even moving from city to city to follow a job. While there may be no legal obligation, there is an emotional and cultural bond that the wise manager will recognize and attend to. If you take good care of your employees, they are far more likely to take care of you when you need their cooperation.

Think about it!

The Coach

http://oregonbusinesscoach.net

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