We were recently contracted by a client to assist with streamlining their business processes, because their entire team was fully loaded – and this was hampering their ability to grow. Considering that their turnover had not increased compared to the previous year, they were apprehensive about appointing additional team members.
What we quickly uncovered is that in keeping an eye only on turnover, they had failed to notice that the composition of their turnover had significantly changed and was signalling a threat to the sustainability of the business.
When selling multiple products and/or services it’s important to analyse margins for individual products and/or services. In the past the vast majority of this client’s turnover had been generated by a high profit margin product and their other (low profit margin) product had merely been a complimentary offering to their clients.
This product was supplied almost on a break even basis. The client did not realize that this balance had severely shifted to lower revenue from high profit margin products and higher revenue from lower margin profit products.
His profits were further eroded by increasing costs such as electricity, fuel and staff costs. Over a period of a few months the increasing costs depleted all profits and the client moved into a significant loss situation and they only had a short span of time left to turn the business around.
If you find yourself in a situation like this, there are three main categories of actions to take:
- Limit anything that detracts from profit
- Increase current profits by optimising costs
- Maximise the inflow from your biggest profit contributors
Be careful when deciding on which metrics to use for tracking business performance, as one can easily fall in the trap of paralysis by analysis. It’s better to monitor a few key metrics rather than to spend excessive time analysing results and not taking any decisions and actions.
Make sure that you regularly review and update your selection of metrics as time goes by. Also continue to monitor the market environment for any changes that might impact on the business.
In summary, it’s critical for any entrepreneur to adapt to changing conditions in the business environment. To do this, these three actions are vital:
- Measure business performance through appropriate metrics
- Understand the measured results
- Take appropriate action based on these two steps
On 14 November 2012 Adapt To Change will be hosting a cost optimisation workshop for Cape Town Businesses and entrepreneurs. This issue and many others will be dealt with. The cost of the workshop is R150 per person. Email firstname.lastname@example.org or visit the website on www.adapttochange.co.za for more information.