Economists have been busy revising their growth expectations upward. Spending is expected to increase across all sectors and unemployment is expected to remain low. This is great news for business in 2018.
With growth in mind, if you haven’t already taken steps to review your strategic plan, structure of your business and cost structure, now is a great time to get started.
Review your strategic plan
Reviewing the business strategically is one of the most important things you can do. McKinsey & Company recently published an article that highlights the actions of exceptional CEOs. When they take the helm, they quickly strategically review the business. You may not be new to your role, but you can take a fresh look at your strategic objectives.
Actions to be taken as a result of the review may include making an acquisition, investing in new facilities or growing your work force. The pace of change is so rapid these days that in many industries, new products are coming out every year and entire product portfolios are changing every five to 10 years. With that in mind, it is important to create enough flexibility such that as your products or services change, the infrastructure of your business supports it.
Finance should be supporting your strategic objectives by allocating resources to strategic priorities. It may be that key people need to be hired or investments made in facilities or equipment. Working collectively with your leadership team, finance should identify and prioritize the necessary investments, funding sources and expected results.
Evaluate the structure of your business
We are in one of the longest periods of expansion on the books. It is easy to focus only on growth when the economy is expanding. That is why now is the best time to take a look at how your business is structured to ensure you make it through the next downturn. Here are a few questions you should consider:
- Do you have enough cash inflow to support your cash outflows?
- Can you flex your cost structure up and down easily?
- How will you retain your best people?
- How much liquidity do you need to have to run your business?
- Will you be in compliance with your credit agreements when your business is at the bottom of a market cycle?
As ownership changes and times are good, it is easy to lose perspective on how the lean times look. This is where finance can help model out how your business operates in good times and bad. It is important when running these models to look at compliance with credit agreements as well. With this understanding, you will be able to determine if you are better off:
- Owning assets versus leasing them
- Having staggered lease terms
- Having appropriate cancellation clauses in your sales agreements
- Insourcing your core capabilities and outsourcing/partnering for non-core capabilities
- Having strong relationships with customers and partners to understand their buying/market triggers
- Having a clear plan to retain knowledge and expertise through your best people
These are just a few of the many considerations that should be reviewed in your business. If you need to make adjustments, it is much easier to negotiate changes when times are good.
Don’t let your cost structure grow too fast
During the good times, it is easy to let spending increase. As costs increase in your business, there should be a corresponding return on the investment in the business. That means your earnings, not just revenues, go up. Increases should be deliberate, controlled and result in expected returns.
Increased costs can be either temporary or permanent. Temporary costs may be one time occurrences that are aimed at making specific improvements in the business. The impact will be lasting and permanent, but the cost to achieve it is temporary.
Permanent increases in cost can become problematic. Once you take them on, it is difficult to reduce them. Hiring people, taking on new facilities, etc. fall into this category. When you take them on, the return should be strong and the business sustainable when an economic downturn arises.
Bringing it all together
Evaluating your cost structure should work hand in hand with your strategic plans and business structure. Taking a fresh look at your business should be as much about not doing /getting rid of things that don’t have an impact/return, as it is about adding/focusing on things that will move your business forward.
Have you taken a fresh look at your business lately? What is holding you back from getting started today?
Heidi Pozzo, founder of Pozzo Consulting, helps business leaders dramatically increase their organization’s value. To contact her, visit www.heidipozzo.com or call (360) 355-7862.
