Now more than ever, business fundamentals are essential ingredients for success, regardless of any global crisis.
Many SME businesses usually believe they have got the basics covered. These are often ignored because they are regarded as either ‘routine’ or too ‘obvious’.
However, managing cash, margins and overheads is the management practice that effectively enables you to build a resilient business and plan for growth.
Today everybody’s focus and awareness on cash is probably higher than it has ever been. However, even when this crisis is over, it will be imperative to maintain a high focus on cash, regardless of whether your business is thriving or not.
Putting aside borrowings or capital invested, the generation of surplus cash only comes from true profits.
Having an increased focus on cash and treating it as if it were profit automatically helps towards improving your operating bottom line. By becoming intently aware of your outflow will make you scrutinise the cost base that you are funding.
Consider operating on the basis that a sale is not completed until the cash is received. This will increase your awareness of payment terms and your willingness, or not, to supply goods and services.
Building a cash surplus provides SME business leaders with time to make considered decisions, rather than worrying about how you are going to pay suppliers or meet the next payroll.
Released from these stressful burdens, an SME business leader can concentrate on activities which contribute to generating profits. Additionally, having cash to hand provides you with a strong negotiating position with suppliers and customers. This enables you to decide the basis upon which you are willing to operate.
Cash is the basis for the various tactics and strategies that can be persued. It should be a senior management performance metric. As the current crisis has shown, profitable companies can go out of business very quickly if they run out of cash.
Margin is more important than revenue. A strong margin will generate profits and cash – the two essential components for business survival and prosperity.
Many organisations focus on order value or sales value. Unless the margin is strong, a company could be draining time and resource for minimal gain. When margins are low, the need to increase volume and capacity goes up. This adds strain to resources that the company may not be in a position to afford.
As you are reading this, you may be thinking “that’s obvious – of course we focus on margin”.
- Do you know the products and services that truly generate you the most profit? Does your opportunity bank represent this?
- Is your market proposition geared towards your highest margin generating products?
- Does your sales team spend most of their time on the high-margin opportunities?
It is sometimes tempting to be swayed towards top line focus. However, the phrase “sales is vanity, profit is sanity” is a good reminder of where we should be concentrating our efforts.
It is likely that every SME business leader is reviewing their cost base at this time. However, this should be a constant, on-going process, regardless of any external influences.
When a business is generating profits and cash, it’s easy for additional costs to be approved and taken on against the backdrop of ‘things are going well’.
Companies become overburdened with liabilities. When a downturn hits you can find yourself overloaded with costs that you don’t really need.
Having come through this crisis, you will have undoubtedly revised your cost base. Even when things return to the new normal, a regular review of fixed and variable overheads will be a vital discipline to ensure that costs do not increase unnecessarily.
One exercise certainly worth considering is reducing overheads to below historical comfort levels. Once the current crisis is over, you might find that replacements for these are not required because the business has found a new way of working.
This COVID-19 crisis and the resulting economic impact has been a difficult lesson for many organisations, particularly SME’s. If you have come through it, having an intense focus on cash, margin and overheads will put you into a strong position to deliver profitable performance.
Check out our next key management practice which focuses on leadership, another vital important component of any successful business.
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