Let's Talk Financial Planning
One major indicator of the business viability is measured by its profitability. In other words, it is the proverbial “bottom line” profit or loss of your business. It is possible to make lots of sales and still go out of business, either because expenses go out of hand or because your accounts receivable is too high. Making sales is important. Watching your expenses is also important.
If you want to improve profitability, you can either pursue an offensive strategy like increasing income or increasing efficiency and productivity, or you can choose a defensive strategy like cutting costs. All too often a strategy of extreme cost reduction is chosen without an understanding the real consequences.
In times of difficulty, reducing expenses may appear to be a quick course of action to produce fast, short term results. However, if looked in the long term, it can also cause a rapid loss of business. If cutting expenses means letting your bookkeeper go (after all, you can do this function), so that you save the cost of a salary, but you are also the top revenue generator and instead of generating revenues, you are entering data into your computer, the long-term ramifications may be disastrous. Reducing advertising can help reduce immediate expenses in the short term, but may cause a disproportionate loss of sales in the long run.
The ultimate success of concentrating solely on expense reduction would be theoretically to drive expenses to zero. You could achieve your goal, but be out of businesses. This focus alone means that if you succeed … you fail.
A more viable strategy is to concentrate on an offensive strategy, one that focuses on increasing income, efficiency, and productivity all the while improving expense management. Increasing income can come from introducing new products to either new or existing customers. It can also come from marketing more of your existing products or services to existing customers, by marketing your existing products or services to new clients, or by taking customer from your competition. Conversely, increasing efficiency and productivity can be accomplished through, cost management, better utilization of assets such as: increasing inventory turns or reducing accounts receivables, juggling your product mix (dropping slow moving items), and evaluating your prices.
While the options might be fairly well defined, it is the trade offs that offer the strategic challenges. For example: if you choose to cut inventory and raise prices, be sure to evaluate the impact on sales. If you choose to increase sales, you may want to watch your accounts receivable, and depending upon billing and pay options, have access to cash if you need it. The most important thing is to consider all the options, and their consequences. Then be sure to revisit your vision and your strategies before deciding on your course of action to look for consistency between your vision, your strategy, and your decision.