Costs come in a number of forms. The obvious is financial, another is time and the third is the well being of the business owner and the business.
In my last blog I presented the imperative of business liquidity, business liquidity being the difference between incomings and outgoings; Revenue vs. Costs. For success, revenue should exceed costs. This allows resources to be reinvestment in the business so that it can continue to grow. It also means that the “boss” can eat. The alternative is a line of creditors looking for their payments, which may never be able to be paid.
The balancing act of ensuring revenue exceeds costs is an ongoing battle as customer requirements fluctuate, the arrival of bills is continuous and the ongoing demand for resources seems to be never ending.
The financial costs that the business incurs need to be evaluated against the business revenue. The main point I would make here is that the business must be cognisant of its costs, continue to evaluate the costs and be always looking to have appropriate costs for the business. If you are fully aware of all your costs, then this can be the basis of determining what the pricing of your products/services needs to be. If the market cannot or will not pay the price you determine, either the cost modeling is wrong or the market expectation means the business viability is questionable. To reiterate, costs must be continuously reviewed and where necessary changes made to ensure the business offering is profitable. I note this week that Google, the behemoth of the IT world, published that they too were reviewing their costs. This just reinforces in my mind that good governance for all organisations (large & small) is the need to pay attention to their costs. Be aware, however, that no organisation ever cut their way to growth, and while cost cutting may create a short-term win by improving EBITDA or net income, it’s not the only focus a business must have.
That said, there is a place for “Sales,” loss leaders and other strategies that mean the business may not return a profit. These are calculated strategies, which the business owner must know about. These strategies are of a limited lifespan but must lead the customer to purchasing products with positive margins (and hopefully high margins). Otherwise, why do it? Consider the printer business where you might pay low prices for the hardware only to find the price of the replacement cartridges is disproportionately high. The obvious conclusion is that the supplier makes the money on the consumable printer cartridges which is repeatable business and sells the printer (which must use the designated consumable cartridge) at cost or less than cost.
Of equal concern is the non-financial costs the business incurs. As an owner, your attitude is critical to the business' success. Do you and your staff greet your customer enthusiastically, with an attitude that says I am here to solve you problem and I can do this better than anybody else? Or is it more about survival and whatever it takes to get through the day. I will have more to say about customer satisfaction at a later time, but the human cost in running your business can certainly affect your attitude and indeed how you treat your customers. Your staff also seeing how you treat your customers will subsequently mirror your approach. You cannot let the negative challenges of running a business affect how you treat your customers; the cost to your business is too high.
As a business owner you need time to reflect on the poor decisions made, the customers who will never be satisfied, the suppliers who cannot deliver stock on time, the employees who will never fit the culture of the organisation and the price increase you need to introduce into the market place. Taking the time to consider your business gives you the luxury of determining the attitude your business will have and the plans you have for the future of the business. As you ponder your business’ future it is useful to use a trusted person who can act as a sounding board. By using this person to bounce your ideas about and help you deal with seemingly intractable issues helps your wellbeing and ensures the cost to the business of poor decisions, or worse no decisions, does not compromised the business under the weight of the number of daily challenges that need to be addressed.
Please contact Robert Carter on This email address is being protected from spambots. You need JavaScript enabled to view it. if you would like to discuss any of this or would like to undertake a review of any part of your business using my 16 Point Checklist.
