Focus on the Numbers Part 1 (Business Basics Series)

Over time I have become increasingly aware of the importance of strategy implementation. Two mantras have struck me as important: ‘what you can measure you can manage’ and ‘revenue is vanity, profit is sanity’. At times like this, revenue is obviously important – to sustain the business and retain employees. In the next 6 months though a renewed focus on profit will be critical. The tips that follow have been gleaned from numerous business people I both respect and admire.

  • Keep budgets under tight control. The real value of budgets is not the help they provide in assessing performance but the way in which they can help you to make sensible financial decisions.  View budgets in this way and you will be less tempted to cut them before having thought clearly about the ‘knock on’ effects of doing so.
  • Keep tabs on inventory.  The fastest opportunity to provide cash for restructuring comes through a reduction in inventory and work-in-progress. A focus on inventory also builds an awareness of the carrying costs of that inventory.  And improving control over inventory brings down the stock:sales ratio which in due course reduces the need for sudden cuts in production when demand slows.
  • Improve invoicing Dispatch all invoices promptly. The quicker invoices go out, the quicker you’ll get paid.  If possible, consider interim invoicing whereby you charge for work done to date even if the project is not completed or the product not delivered.
  • Control debtor risk.  Downturns inevitably lead to an increased risk of debtors defaulting.  Be aware of the status of each debtor.  Check credit references closely.  The keys to successfully averting problems are to review information regularly and to concentrate on the most important debtors.
  • Collect late payments. Ensure that there is one person in the organisation responsible for collecting late payments.  Make sure he or she has an effective process for doing this.
  • Avoid becoming your customers’ banker.  Make your terms of credit clear.  Monitor your debtors carefully and maintain a strong policy on cash collection and credit limits and terms. Do all this in a manner that does not damage your relationships with your customers.
  • Pay later.  It is a fact of life that larger companies respond to pressure from their own customers by paying their bills much later to smaller companies. Paying bills a little later is a recognised tactic.  The extra cost that might be imposed by the supplier for late payment must however be weighed against the benefit of retaining the money a little longer.
  • Persuade customers to pay up front.  A classic strategy in a tough economy is to get the customer to do the financing. Can the customer be persuaded to pay up front?  For expensive or custom-made products or services (or for first-time customers) consider instigating a policy of ‘payment with order’ or try the ‘voucher system.’
  • Keep open lines of credit.  Regularly talk to your financial backers (especially banks) to keep them informed of your plans and your situation and to ensure sufficient sources of finance are available to you.

The next topic in this series is Focus on the Numbers (continued).

Leave a reply

Your email address will not be published. Required fields are marked *