Weathering the Economic Storm - Part 3 - Review Costs

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 spoke about managing your business to improve profitability.  While you should be doing these things all the time, you should pay even more attention to them during a period of economic distress.  Here in part three, I'll discuss reviewing your costs.  Yes, I know it's another 'Duh', but....

Review Costs

The small business owner should review cost structures and operating efficiencies and make improvement plans.  Start with your product costs.  Look for ways to reduce costs in every phase of operations.  If you can save a few pennies of cost in each operation, you’ll make your whole business more profitable.  Some of the more obvious ways to reduce your product costs are:

Inventory Management:

• Better manage your inventories
• Improve your purchasing efficiencies
• Review your min-max order points to reduce costs
• Work with vendors to improve delivery lead times
• Consider bulk purchase contracts to reduce costs
• Use vendors to warehouse raw material inventories
• Use just in time deliveries where possible
• Evaluate employee counts and efficiencies

Review Operating Costs of:

• Employee workloads and counts
• Benefits coverage and costs with your insurance agent and make changes as appropriate
• Your energy usage; on plant equipment, warehouses, offices - everywhere you use it
• Operating costs of in-plant vehicles
• Fleet efficiencies; track # of deliveries, % of truck full, speed, idling

Review Costs of Services:

• Telephone
• Internet 
• Waste disposal
• Electricity, natural gas, water
• Confidential shredding
• Temp employee contracts
• Office equipment service contracts

Financial Costs:

• Insurance coverages
• Bank line interest rates
• Credit card fees
• Merchant account fees

The lists can go on and on, but I think you get the picture.  With your management team, divide and conquer.  Split the company operating costs in to categories and assign each to the manager most able to attack costs in that part of the company.  Take each category and apply a simple Pareto analysis to the costs and start with the biggest.  Don't be afraid to think outside the box either.  If the only way to decrease fleet costs is to design and implement a fleet safety policy, then do it.  Generally speaking, the safer and more well trained your fleet, the less accidents they'll have.  Fewer accidents mean lower insurance cost, lower deductible costs and lower damage to leased delivery vehicles.  You win all around, plus your employees behave more safely, and that's always a good thing.

Once you've reduced costs as far as possible on the first item, start working on the second item.  On the other hand, if you find that you can save money on an item further down the list by making a simple change, do it.  Take whatever approach works for you and your company.  As those shoe guys say, "Just Do It!"

NEXT:  It's the Cash!

Weathering the Economic Storm - Part 2 - Review Profitability

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