A Focus on Profit

In times of turbulence, often fundamentals are missed to be replaced by a knee jerk reaction. Of course if a decline in sales is predicted, cost cutting is required, but in which areas? The first job of a CEO is survival of the company. Survival is not about dressing up the P & L for the short term but ensuring the business will operate effectively in the medium to long term. Step 1 is to find out urgently which segments - customers or products that are the real contributors to profit. Be ruthless in pruning unprofitable lines, avoifing the mistake of course of allocating fixed overhead which doesn't disappear. In addition, move where possible from fixed to variable costs to ride the volatility.

At all times a company’s key performance indicators drive behaviour, but are they the same through the cycle? In times of turbulence, historical financial information helps you as much as driving looking through a rear view mirror. Although trend analysis may not predict the future, it is a start, and using trailing indicators removes seasonality. Focus on the lead indicators that determine the operational activities that, in turn, drive financial performance. Ignore what your Financial Controller has served up for the last few years - what indicators really drive your business going forward?

Focus on Working Capital

Often overlooked in the focus on profitability is how companies respond in terms of working capital. This is not the domain of the Finance Director (he/she are rightly concerned about long term funding) but at the heart of operations and strategy.

Decisions on raw material sourcing, product range and stockholding and the offer (and enforcement of) credit terms have an effect on profit but a much more dramatic (and quick) impact on cashflow. And it is cashflow, whatever the size of the company, that will be even more critical over the next five years.

Addressing the supply chain and inventory issues has been a massive and continuous effort by many businesses even over the last years because pressures on price from competition and raw materials have remained intense. If you want to be re-energised, read "The Goal" by Cox and Eli Goldratt. Just in Time processes and Lean thinking are well established for manufacturing businesses, but these can also be applied in service industries.

Focus on Trade Credit

Credit is the most overlooked tool in most B2B companies. Usually within the finance department, the credit specialists know their role, but are they encouraged to be cautious. The reputation as business prevention officer is justified. In current riskier times, unless one is careful, this stereotype will be perpetuated. Click here to view an extensive commentary on Trade Credit inclusding papers written by Jon Lindsay in Credit Management Journal, Business Money and links to other resources.