Simpler Business Institute

Newsletter # 1 - Remove costs before removing staff!

Welcome to the first newsletter from the Simpler Business Institute. The background to the Institute was a set of tools and processes I developed or adapted from others during the recession of the early 90s to help companies out of difficulties at that time. It's just a coincidence that we are launching the Institute now, at another time of major economic downturn. But this means we can talk about the burning business issues today and relate them to the solutions we found during the early 1990s and also to the dot.com crash in the early 2000s.

There's a lot in the media today concerning jobs, or the loss of these due to the global financial woes. Of course, the wages bill for most companies is substantial and it's the first to be scrutinized when times get tough, but there are many other opportunities to remove costs or increase profits before resorting to letting your staff go. Invariably, this means letting some of your good people go, people you'll be looking for again when the upturn inevitably comes along.

To help you with some ideas of what can be done before resorting to retrenchments, I've put together a list of some of the common-sense ways businesses have removed costs in the past to increase profitability. They are in no particular order - every company's situation is different - and you really need to perform a break-even calculation for your business to understand what costs you need to cover each month in a time of low demand for your goods or services.

Common sense ways to remove costs

•         Stop selling your low-profit (or loss-making) products.

•         Stop servicing your low-profit (or loss-making) customers.

•         Stop developing products that won't deliver good sales+profits in the short term.

•         Focus all your staff on your profitable products and customers so that no money is being wasted on the low- or no-profit products and customers.

•         Refinance your expensive buildings and equipment to take advantage of the low interest rates - interest rates are the major difference between this economic downturn and in the early 90s, so lower your repayments as soon as possible.

•         Identify and remove the main constraints from your business processes - these constraints are areas of unnecessary costs that are killing your profits today.

•         Apply the 80/20 Test to all your projects or activities where people spend time not related to getting current work out the door. These may be large or small projects, but the following two questions may save you a lot of money right now:

-        "What are the 20% of projects that are going to deliver 80% of the benefit to your business in the short-medium term?" Focus 80% on these.

-        "For each project that you decide to continue, what are the 20% of the planned outcomes that will deliver 80% of the benefit?" Focus on these now!

•         Apply the 80/20 Test to your Compliance costs - how can you achieve the majority of your compliance requirements with the minimum level of input?

•         Cut administrative costs where easily possible, noting that these are generally small amounts compared to the costs associated with the items above. (If you have developed an unnecessarily complex performance reporting system, you will be able to achieve 80% of management control with just 20% of the performance measures, so identify these and remove the measures that do not add real value).

•         If you are currently implementing new information systems either within your business or along your value chain, ask yourself right now "what are the few pieces of information that will give me most managerial control in the short-medium term?" and re-focus your info systems projects to deliver these.

There are costs associated with all of these items, but they are more than wages costs! If you focus on doing good business right now that delivers real value to your customers, and by value I mean "it makes them more successful in whatever they want to achieve", you will find that you can remove a lot of costs prior to having to cut jobs from your workforce.

Unfortunately, many businesses do not have the cost information within their accounting or production systems to be able to accurately define the profitability of their different products and customers. If this is your case, you will have a big job ahead to gather this information and by the time you have it all, you may be in a much worse financial situation. An alternative is to use the combined knowledge of your key people to develop a good approximation to the relative profitability (or attractiveness) of your products and customers - see the Start Your Turnaround tool on www.simplerbusiness.com .

A final note: If you are in the situation where your main products and customers are low-profit or no-profit activities, then you have no choice but remove costs from your current business and production processes to regain profitability. How to do this will be the subject of a later newsletter.

For now, simply does it!

Ian Dover