Changing Strategy In Changing Times

Effective management can take the following steps to maintain positive cashflow and profitability in a slowing economy.

1. Measure capacity and utilisation
   
   Capacity and utilisation, more commonly associated with manufacturing, can also be measured in a service organisation. Whether you're selling air tickets, processing claims or dealing with complaints, capacity and unit cost can be established. If you are doing less with the same, beware of a trend to do less with more. Utilisation identifies scope for growth and economies of scale can drive improved productivity.
   
   
   • If you are staffed for growth, what changes are required when demand falls?
     
     
   • If demand dips, is it time to convert some specialist roles into more generalist roles?
     
     
   • What scope is there to reduce fixed cost during slow months or increase demand in these months?
     
     
2. Use a counter intuitive sales strategy
   
   Don't allow your organisation to be a victim of a negative mindset because of a dip in demand. Who says a negative mindset needs to be shared equally? Let your competitors bemoan tough times.
   
   
   • Focus your sales staff on developing business with existing clients and winning new clients who appreciate the value of your market offering.
     
     
   • Focus the sales effort on increasing the volume of high margin products.
     
     
   • Examine scope to eliminiate some of your low volume/low margin products.
     
     
3. Examine scope to increase throughput
   
   Throughput is simply the volume of completed work. When demand slows, don't allow the organisation to slow with it. Better practice is to plan to increase throughput. It's a wonderful time to map the process and identify scope for greater efficiency by removing unnecessary steps and waste. It provides greater incentive to proactively seeking new customers to take up under utilised capacity.
   
   
   • Technology and better integration are good starting points at improving throughput.
     
     
4. Review prices to protect margin
   
   Don't reduce your prices - eliminate all non-value adding costs. Some of the earlier steps will help you to do that. Consider target costing. That is achieving a competitive price with your desired margin by reducing your costs in providing the goods or services. Effective managers see no choice, only challenge, in determining whether to reduce cost or sacrifice margin.
   
   
5. Invoice immediately
   
   Revenue is the life blood of an organisation.
   
   
   • Blood doping is legal in business. Give yourself a cash positive transfusion more regularly.
     
     
   • Get goods and services through the system more quickly with a corresponding increase in revenue.
     
     
6. Debtor management
   
   Some of your clients will be better than others at managing a drop in demand.
   
   
   • Don't get caught with a client's debt problems. Monitor debtors closely.
     
     
   • Put a Credit Policy into place and make it operational.
     
     
   • If necessary, cease supply to clients who enter into debt payment agreements and then remain unable to meet the commitment they previously agreed to.
     
     
7. Undertake a waste audit
   
   Waste is an inevitable consequence of people led systems. Humans are ingenious at creating waste and even more ingenious at accepting waste as part of corporate life. Times of high demand can lead to ineffiency when getting it done is more important than getting it done efficiently.
   
   
   • Waste can be classified, identified and eliminated with the right mindset, a clear target, and rewards for those who minimise waste.
     
     
8. Review inventory
   
   Reduced demand should mean less inventory. What inventory is being kept for a rainy day that can be released? You may have thought your were operating under a Just in Time (JIT) approach. In reality, it is more likely to be Just In Case (JIC) with a margin for error. It's time to be realistic.
   
   
   • Use the Stock Turnover ratio to identify scope to reduce the dollars tied up in inventory.
     
     
9. Reduce debt financing
   
   The cheapest form of finance is internally generated working capital. Make your money work for you.
   
   
   • Review your need to finance for short term cashflow and reduce it wherever possible. Credit is instant debt and only adds value to a business where the costs are exceeded by the return.
     
     
   • Consider consolidating loans and selling financed equipment which is no longer required.
     
     
   • Exercise better control over credit card spending as it will have a positive impact.
     
     

To ignore the uncertainty of changed economic conditions is equivalent to working in the dark and leaving yourself exposed to the sun needlessly. Managers must demonstrate their ability to manage changed economic conditions.

John Cleary, Principal, Cost Management Specialists. Cost Management Specialists have been manufacturing profit for client for fifteen years and have a proven track record in working with clients to find and release hidden profit in business. Cost Management Specialists clients have diverse needs from achieving growth to survival. Whatever their needs, Cost Management Specialists clients appreciate the outcome focused and value for money. Visit www.costms.com.au for more information.
First published: 19 February 2008.
Last updated: 19 February 2008.