First published on 12 December 2011 by Tony Groom
While businesses might be concerned about a Eurozone Armageddon, whatever the outcome they will need to ensure survival for the period of austerity that is likely to characterise the next decade.
Although growth is desirable, and has been the purpose for many businesses, a more realistic objective in times of uncertainty is to stay in business for the next five years.
Arguably the best way to achieve perpetual business survival is to avoid running out of cash. This involves examining all cash commitments and where possible turning fixed costs into variable ones so as to reduce the breakeven level of sales necessary to cover overheads and fixed obligations. All too often hitting sales targets can only be achieved at the expense of margins. The flexible business model means that you no longer need to take on unprofitable work.
Long-term fixed obligations can be anything from fixed-term rents, hire-purchase or lease agreements, repaying loans, servicing interest, supply contracts and staff employment. The common examples where companies have taken on such commitments tend to relate to: offices, plant and machinery, IT equipment and software, vehicles, signage, furniture, printers and photocopiers, mobile phones and telephone systems.
Most companies also fail to cancel or at least review contracts that automatically renew, such as: IT equipment and plant leases, life insurance, medical policies, employee benefits, subscriptions and membership, servicing and maintenance, office and window cleaning, sanitary towel and waste removal, portable appliance testing (PAT), health, safety and fire extinguisher inspections and so much more.
A recent example was a company that continued paying GE Capital for seven years after the minimum three-year term of a lease purchase agreement for an expensive computer server. GE Capital was not at fault as their agreement stipulated three months notice of termination after the minimum term. That the server was no longer being used was irrelevant, no review of expenditure had been carried out to highlight this and many other examples of unnecessary payments.
The key message is to review every payment and check whether it is necessary and you are not being overcharged.
While it sounds counter-intuitive, businesses often make more money by reducing sales. It is worth looking at the quality of contracts and the quality of customers. Some business is more trouble than it is worth, or takes up more time than can be justified or is simply not profitable. Reducing sales can mean a company needs fewer staff, lower overheads and fewer resources such as a smaller factory or office. Lower sales generally mean that you do not need as much working capital tied up in funding the business.
The benefits from focusing on only those contracts and customers that provide an adequate profit, that pay well and pay on time can be considerable. Gross profit margins are increased, overheads are reduced by not having to chase payment and less cash is needed to fund pre-sale payments and post-sale credit.
While many private householders seem to have got the message about cost comparison and now regularly switch energy, mobile phone, internet and landline suppliers, all too many companies are focussed on chasing sales (and tails) to review costs and find ways to reduce them.
Any review should also look at other ways to cut spending. Huge savings can be made to reduce travel and communications costs such as using internet-based phone and video conferencing facilities like Skype or VOIP services. Most landline phone numbers can now be ported to an internet service provider, some charging as little as £1 per month per number and little more as a fixed cost for all outbound calls.
It can be tempting to save cash in the short term by entering into a lease or rental agreement. However paying such contracts can become a real burden if business declines. Indeed many companies are finding themselves tied to long-term contracts they no longer need.
Business turnaround specialists usually find themselves having to adopt a triage approach to cost cutting as they tend to be brought in when a company is running out of cash. It is rarely ever too late as they can crystallise contract termination liabilities in a Company Voluntary Arrangement when the company cannot afford them. However it is preferable to take action early and carry out regular reviews as part of a programme of continuous business improvement.
The flexible business model is based on a principle of not having to pay out cash if there is no cash coming in. It ensures survival whatever the circumstances. The knock on effect from the financial collapse of Dubai World meant that a lot of firms did not get paid. One design company with high overheads due to payroll commitments reinvented itself to keep most of the team together, albeit unpaid. As partners they were able to survive for over six months before any work came in. It was tough at the time but they are now thriving.
Survival taps into human reserves that few are aware of. It needs leadership and teamwork but a focus on improving profitability, on reducing costs and on converting fixed overheads into variable ones means that a business can achieve perpetual survival.