Management Memos

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January 2019
 

January 2019 How Much Profit Will Be Enough?

 

Everyone's working hard to get the most profit they can. So why such a dumb question? In 2019, this isn't a dumb question. It's vital!


There's always a mountain to climb in business, We're always looking to build wealth, and it's always hard. On the other side of the coin, anyone who has ever tried to make more, knows that every direction you turn brings limits on what you can do.

So when you end up making a profit, you don't ask, "Will it be enough?"

Today you should ask that question, and make sure you give yourself a genuine answer.

Tough Year Ahead

2019

Given the dangers lurking in the economy generally, a critical question right now is "Will my profit be enough to insulate me from a catastrophic downturn?"

It is important to maintain perspective. A recent client could not accept the warnings that their profit was so small, their margin for error was wafer thin, and they needed to change. It would have been better for them to take that protective management mantra - "expect the best, but plan for the worst".

So for you, the question is "What might be the worst this business could experience in 2019?" In that worst-case scenario, will your profit have been enough to give you the commercial resilience to bounce back after the storm? Now, plan to handle that worst-case scenario.

Batten The Hatches - Strong Head Winds This Year

As we move into the new year, there are several geopolitical and economic factors at work. All of them could turn out to be benign. Fabulous!

Batten Down The Hatches

They could also all turn bad, savage the world economy, and squeeze your business along with it. Not fabulous!

If you lose a year of planned growth, that's not good. If your business fails, that's quite different!

While most SME people take these global factors in their stride and feel there's nothing they can do about them anyway, it's easy to be vulnerable. Now's the time to make your business resilient. Then, if a major debtor does go broke because of the slowdown, it won't leave you with a cash problem. 'Planning for the worst' really helps when the storm strikes!

Five Major Influences This Year

Let's look at the major dangers:

Sino-US Trade War

The most likely effect will be a general dampening of the economy, with the inevitable effects of slower trade and reduced margins. New restrictions on Chinese property investment in Australia, and a slowing Chinese economy are limiting the scope for Chinese investment here.

Brexit

This complex situation will drag down the world economy by feeding into the general disruption of world trade.

Australian Housing Slump

The broad effect of the housing slump is slower trade, so you'll find it hard to keep that profit turning into healthy cash flow. You'll need to price match, or reduce margins in other ways to keep sales moving.

Slowing Australian Economy

Not everyone's feeling it yet, but the signs are clear. Like the 'Black Friday' splurge turning out to be a discounted pull-ahead of already planned Christmas spending. It was not a sign of a big Christmas spend on the way.

Australian Federal Election

While it seems silly, an imminent election can depress business activity. It is most likely that a whole slew of business decisions is in the 'slow queue' until the election is decided. There could be an avalanche of spending after the poll.

So What?

You need to keep cash moving, and that means make a sale and move stock!

Remember that "you can't bank percents", so keeping your gross margin up where it should be is not worth a cracker, if the sales don't support it. You need to have gross profit dollars you can bank - not a particular gross margin.

That means, make the sale!

Get The Right Price

There is a real art in making the sale when times are tight and every dollar of gross profit is desperately needed. It is always a matter of judgement, and if the customer can't be caressed into buying at the best price you offer, it hurts.

Work out your minimum price before that day comes. If you do that right, you'll be surprised at just how many extra sales you can make and add to your gross profit. One way to do this is to use the My Red Zebra 'Full Value Pricing Calculator'. It takes away any guess work on your business numbers, leaving you free to work on the customer. It's a great aid to growing the business, but it's not free.

Keep an Eye On Cash

Plan YOur Cash Flow

While times are tight, and particularly while sales are still rolling in despite the difficult times for some others, it's just the right time to consider your cash position. Given the cash you're generating by making sales, and the cash you're burning by paying suppliers and covering your business expenses, do you have a cash reserve (bank balance for most) that can cover trading at a loss for several months on end?

Some seasonal businesses make their money in just a few months, and often lose money for four or five months in a row in their 'off-season'. If that's you, are you making enough in that peak season?

The answer lies in your cash forecast.

 

Haven't done a cash forecast? Then now is the time to begin. You'll need help. It can be scary, but it will be your life jacket in the storms ahead. If there isn't a storm, that will be great. The signs, however, are worrying, so you do really need to know "Will my profit be enough?"


We can help you see your strategic strong points, protect your strategic weak points. After that, you can just hang up - if that's what you'd like to do. NSA!

Phone us (see the numbers below) or use the contact form here to get help. Absolutely obligation free.

 

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Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.