Your Cost Structure As A Source of Value
The third section of this series will focus on strategies to Regenerate your business while navigating crisis. The consistent thread throughout all phases is preserving cash flow. Cover your operating expenses, create/retire debt, target investments in business capabilities, pay taxes and pay yourself. However, most of the questions I get deal with where to obtain the funds to invest.
Given a fixed amount of funds you have to invest, it means focusing investment in things that are meaningful to customers and repurposing it away from other areas (not that they’re not important, but they’re not as important). For example:
- Focusing investment in your core product or service and repurposing it away from overhead.
- Making low-performing areas of your business better, and cheaper
- Using the profits from “cash cow” products to fund innovation that could represent your next strategic product/service
- Looking hard at demand for spending on non-core capabilities, like IT. Do I need that much, that often, that good?
What if…Your business could emerge from this crisis in better shape than when it began?
What does it mean to invest in business capabilities? It means investing in the things that, directly or indirectly, add value to customers. We want to invest in the effectiveness of these. For example:
- If you’re in the business of selling widgets, then on making more valuable widgets.
- If you’re in the services business, then improving the value proposition of your people.
In addition, we have manage the value proposition of business support functions (finance, HR, IT, legal, facilities, etc.) that we need, but do not differentiate us or add value to our customers. We want to invest in the efficiency of these.
Why talk about cost management? Because it can fund some or all of the investment you need. It’s not a big bet – you already have it! There are a lot of people who can take cost out of a business, but you need to do it without impairing your strategic ability to compete. Many of us have a primary fixed-cost (and fixed-capacity) model, and we tend to not scale all that well for growth or contraction. Many Fortune 500 businesses use outsourcing to reduce unit cost, but they also use it to create a variable-cost component of their operating model. For businesses with uncertain volumes (perhaps now), variable costs seem to work better. I like to start looking at an operating model with this perspective – how can we convert some cost behavior from fixed to variable? My experience is that business leaders consider this in times of stress, but it really should be a strategy to use all the time.
COVID LOAN UPDATE
While most of us are working our way through the uncertainty of 2020, if you have not yet applied for stimulus funds it’s not too late! Reply and let me know if you have any questions or, I can put you in touch with the partners at BKM Sowan Horan. We are knowledgeable and responsive if you need help in this area.
Also, not forgetting those of you who have already received stimulus funds! The partners at BKM Sowan Horan teamed with Pegasus Bank a couple of weeks ago to host a Zoom on the topic of Navigating PPP Loan Forgiveness. They compiled over 120+ questions and provided answers to all of them. The Q&A document is chock full of great information which may be helpful as you work to obtain forgiveness for your own loan (click here to see the list).