In part one of the series on Weathering the Economic Storm, I discussed using dashboards to identify the most important performance measures of your business and keeping them in front of you and your management team. In part two, I'll talk about profitability. I know, many of you are saying "duh!" But my experience in nearly three decades of business, large and small, is that things that go without saying, should be said.
Review Profitability
While a dashboard is the first place to start, it’s only the beginning. In difficult economic times, you need to re-evaluate your whole business model and squeeze out every penny of cost and every measure of efficiency in your systems. Begin by looking at the big picture, but on a smaller basis. Create weekly income statements and cash flow reports to discover faster if you have problems. If something doesn’t look right, dig deeper into the numbers to see what’s happening and hopefully be in a position to take action quickly. Don't wait for a whole month to go by and then wait a couple of weeks more to prepare official statements before you look at something. Use the basic output from your accounting system and call it 'close enough' and take a look every week at your performance. You'll know which accrual items are missing and which month-end entries are not included. Don't get hung up on those details. Look at the basic performance of the business units and hunt for abnormalities. If you find them, go to the source department and try to determine the root cause of the issue.
Also look at the profitability of your major product lines and customers. Do you have products that aren’t carrying their weight? Evaluate the possibility of raising prices, changing the cost structure or physical makeup or whether to quit making the product or service all together. It does you no good to produce products at a loss unless a very small real dollar loss is creating big profits or dramatically reducing costs in another product line.
If you have customers that aren’t profitable, evaluate them in the same way you would a loss-producing product. Do you really need a customer that causes you to loose money? Unless they provide some other benefit far in excess of the losses they produce, you need to discuss price increases to make them somewhat profitable or help them find another supplier so you can stop your bleeding. While getting rid o a customer flies in the face of conventional wisdom, you don't need to keep a customer who's putting you in the red. In some cases, customers who know their accounts are not profitable will be willing to work with you to find solutions so they don’t have to find another supplier. However, if they don’t care about your mutual profitability, it’s time to send them packing.
NEXT: Reviewing Costs
Review Profitability
While a dashboard is the first place to start, it’s only the beginning. In difficult economic times, you need to re-evaluate your whole business model and squeeze out every penny of cost and every measure of efficiency in your systems. Begin by looking at the big picture, but on a smaller basis. Create weekly income statements and cash flow reports to discover faster if you have problems. If something doesn’t look right, dig deeper into the numbers to see what’s happening and hopefully be in a position to take action quickly. Don't wait for a whole month to go by and then wait a couple of weeks more to prepare official statements before you look at something. Use the basic output from your accounting system and call it 'close enough' and take a look every week at your performance. You'll know which accrual items are missing and which month-end entries are not included. Don't get hung up on those details. Look at the basic performance of the business units and hunt for abnormalities. If you find them, go to the source department and try to determine the root cause of the issue.
Also look at the profitability of your major product lines and customers. Do you have products that aren’t carrying their weight? Evaluate the possibility of raising prices, changing the cost structure or physical makeup or whether to quit making the product or service all together. It does you no good to produce products at a loss unless a very small real dollar loss is creating big profits or dramatically reducing costs in another product line.
If you have customers that aren’t profitable, evaluate them in the same way you would a loss-producing product. Do you really need a customer that causes you to loose money? Unless they provide some other benefit far in excess of the losses they produce, you need to discuss price increases to make them somewhat profitable or help them find another supplier so you can stop your bleeding. While getting rid o a customer flies in the face of conventional wisdom, you don't need to keep a customer who's putting you in the red. In some cases, customers who know their accounts are not profitable will be willing to work with you to find solutions so they don’t have to find another supplier. However, if they don’t care about your mutual profitability, it’s time to send them packing.
NEXT: Reviewing Costs
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