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Navigating your business: Best practices in and out of recession

23 October, 2009

Why is it that certain companies only take the time to tighten their belts when times are tough?

By Vision

Whether you are in or out of a recession, doing the right thing just makes sense. When the economy hits a roadblock, those companies with good business practices have a much greater chance of making it out in one piece.

Start doing the right thing now, and make it your doctrine. When the economy hits a recession, financial institutions tighten lending and credit. Its effects are cumulative and propagate throughout the entire economy.

The immediate reaction is to pull back on investment, cut costs, and avoid any unnecessary spending.

For business owners, the effects are felt immediately, and the resulting declining customer values are measured in lost business and diminished revenues.

There are ways to use available resources while maximising declining customer values to weather this storm.

1. Take the time to evaluate your inventory exposure.

Inventory costs are often misunderstood. These are costs companies are either completely unaware of, or simply choose to ignore.

Typical inventory costs run between 30-40% of the inventory value on hand. To give some idea of this cost, a company with inventory of one (1) million dollars, could cost between three hundred to four hundred thousand dollars a year in support costs.

Some of these costs include dead stock inventory, damaged inventory, the daily cost of money, cost of warehousing, overtime, expedited freight costs and the cost of electricity.

When companies take the time to understand the impact of their inventory costs to their bottom line, it becomes one of the primary areas to look at when needing to save money.

Who is buying your quick sellers and are they healthy customers?

For your quick turnover items, identify those customers who are purchasing these products and asses their viability for future business.

Are they healthy customers who will survive this current economic crisis? Have their invoices continued to be paid on time during this period?

If the answer is yes to both these questions, you will immediately qualify these high inventory turnover items as essential to your business. Discuss your continued supply of these products to your existing healthy client base.

Move your slow moving inventory to "made to order" business only.

Identify your slow moving inventory and asses whether these items can be sold immediately to your healthiest customers.

Be willing to make deals. Assess the cost and liquidate the inventory immediately.

Once this is done, move these product classes to "made to order" business only. This means that you will no longer hold inventory of these items, but will provide them to your customers provided they are willing to accept a lead time.

This will immediately limit your inventory exposure and ensure you are only shipping product that has already been purchased. This guarantees that it will not remain in your inventory.

Liquidate dead stock immediately and use the $1.00 savings rule.

Your dead stock inventory must be eliminated. While you may not be able to sell this inventory to your existing clients, there may be other applications in other industries where it could be sold.

Can you take this inventory and sell the materials or parts as scrap? Scrap collectors will purchase anything from copper, brass, nickel, aluminum, as well as general plastic.

Use the $1.00 saved rule
(live by the $1.00 saved rule and minimise declining customer values).

How much does it take your company to generate $1.00 in pure profit? For some companies, it can take $10.00 or more in sales to generate $1.00 in direct profit.

Every dollar saved is a direct return for your company. You may rationalise that you have already lost money and can probably find some customer some day to take it.

While that may be true, are you willing to take that risk? Think of your bottom line. Is keeping dead stock is costing you money every day? ??Understand the daily cost of money.

??Every day you hold dead inventory, that could otherwise be sold as scrap or liquidated, is another day you are losing money.

The yearly interest rate you would be able to get for the value of this inventory can be applied to a daily interest rate you are losing out on.

To simplify this, assume you had up to $200,000.00 worth of dead stock. While you would not be able to get the full value of this amount, you may be able to get 50% of this value, or $100,000.00.

Do not view this as lost money. The value of this inventory was lost a long time ago. It is simply costing you more and more every day that you do not liquidate it.

If you can get a higher return than 50%, consider yourself lucky. Assuming the highest interest rate you could get for your money in this economy is 2.5%, the daily interest you are losing is this 2.5% divided by the 365 days in the year.

This would be 0.00685% per day, multiplied by $100,000.00, or $6.85/day. This does not sound like much, but remember the $1.00 saved rule in difficult times.

2. Establish a proactive plan to maintain or grow business levels at existing healthy accounts.

??Understand what your competition is doing during this crisis.

Are they entrenched and cutting off credit to all accounts? Are they insisting on prepayment from everyone? Are they cutting back on services and aspects of their business that distinguishes their service offerings?

Use this information to your advantage. Capitalise on the knowledge of how your competition is handling this crisis. Use it as an opportunity to expand your own service offerings.

Expanding services does not necessarily mean you will need to invest more money. It simply means you will increase the likelihood that your customer will return to your company to purchase.

Do this by encouraging them to buy from you.?? Use incentives and reward programs to encourage customer loyalty.?? Start working out deals to offer rewards for attaining volumes within a month or a quarter.

Use credits, free products, or discounts for your best performing customers.??Use your overstock liquidation to save your customer money.??

Offer your slowest moving and dead stock inventory at discount prices to your best customers.

Advise them you are only offering this to your best accounts. Make deals and remember the $1.00 saved rule. Live by its code!??

Use conference calls and video conferencing instead of customer visits.?? Your customers should understand your inability to visit them. They most likely have travel restrictions themselves.

They may even have reduced staff, or reduced hours to save money. Explain that for the time being, you will not be able to visit. Instead, use either conference calls or video conferencing as a substitute.??

Provide incentives for Prompt Payment. Defeat the daily cost of money by encouraging your customers to prepay or pay immediately upon receiving the product or service.

Offer a 1% discount on the value of the invoice with net-10 day terms. Essentially, you will give them a discount provided they pay you within 10 days of receiving the product.

You will save on the daily cost of money, improve your cash flow, and save your customer money.

??Investigate opportunities for sales in other industries and applications. ??Remember that a number of companies have closed. The economic tsunami has claimed many companies, and will claim more.

Your company may just be able to fill this void. Take the time to investigate common applications in other industries.

3. Apply the $1.00 rule throughout the organisation.
??

When it comes to the benefits of the $1.00 rule, do not just apply it to your inventory. Use its principles throughout the entire organisation.

Gather your troops and make it their mission to find new and inventive ways to save money in every possible way.

Keep track of the savings and make everyone feel a part of the solution, not part of the problem.

Take the time to explain the idea behind the rule. Make sure to explain just how much in sales would need to be generated in order to produce that $1.00 of profit.

Looking for some ideas? Below are some popular initiatives to look into.?? Save on electricity by eliminating all non-essential spending.??

- Take that electricity bill and develop a strategy to cut spending. Do you have an alarm system?

- Consider shutting if off completely during the time everyone is at work. Turn off the lights in the hallway, or disconnect the refrigerator in the kitchen.

- Keep a balance sheet of your month to month success.?? Sublet some of your office or warehouse space to generate rent.?? Remember, there are other companies who want to save money.

- You might be able to provide low cost warehousing or office space for rent. Look at some of that warehouse space that was cleared up when you liquidated your inventory.??

- Offer additional services to these tenants.?? Use what you know with these new tenants by charging for additional fees to help them with their shipping, IT requirements, or any other service you could offer that could save them money.

- Come up with some inventive ways to generate new sources of revenue.?? Immediately liquidate unused office furniture, computer equipment, etc.?? Do you have a bunch of office furniture or computer equipment that you could immediately sell? What else do you have at your company that could be liquidated?

- Make finding new ways to save money a company initiative, and get everyone working towards a common goal.??

There is nothing easy about going through the pain of a recession. The effect on your business can be measured in lost customers, diminished revenue and low employee morale. There may have already been a number of layoffs.

With a staff that may already be assuming multiple responsibilities, there is no additional benefit to further job cuts.

Live by the $1.00 rule and provide incentives to your employees to become part of the solution.

Use this approach with your inventory, your customer base, and throughout your entire organisation. Provide motivation, and get your employees feeling empowered again.

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