This article was originally created for Hayes Knight (now Nexia Auckland).

28 August 2012

For an entrepreneurial and experienced small business owner, the reactive survival strategies of the past were the foundations for good business practice today. Scott Travis shares his encounter.

While on a recent break overseas I was fortunate to meet an inspiring entrepreneur, we’ll call him Charlie, who runs a successful business manufacturing outdoor wood products predominantly for the domestic trade and retail market. While enjoying a quiet drink together our discussion soon turned to the economy and the difficulties faced by SMEs.

I could sense Charlie’s confidence and sense of achievement as he described the measures and strategies he had implemented to ensure his continued success. What I took away from our conversation was an appreciation for the way that reactive survival strategies of the past are now considered good business practice.

Getting on top of the business overheads

To his credit, Charlie sensed early on that the recession was going to be more than a short-term event. He undertook a line-by-line review of his overhead expenses, cutting discretionary expenditure and reversing a trend of creeping overheads that had been established in previous years. For the remaining overhead, he undertook an exercise to evaluate whether he was getting good value in terms of price and quality, utilising supplier incentives and taking advantage of discounts on offer.

Striving for continuous improvement

Charlie knew it was not just about overhead control – you can only squeeze a lemon so hard. Charlie wanted to improve efficiency. While producing a mix of custom and off-the-shelf products he was able to carry out a review
of his processes and systems, identifying areas where improvements could be made in order to improve efficiency. Reducing timber wastage was an easy target. For example, if they needed a piece of wood for a 470mm component then they would make sure to select a piece from the 500mm pre-cut bin and not just the closest bin to the work area. These types of observations lead Charlie to review and later reconfigure the layout of the factory.

Customer focused

With a decline in demand from both trade and retail, Charlie recognised the value of his existing customers and sought to ensure that in an environment of price pressure and increasing competition he retained their business. By
spending a bit more time with their customers in the initial phase of each project it was easier to identify what was really important to them. This, in turn, ensured that what was delivered was aligned to their customer’s expectations. For Charlie this often meant doing the extra hard yards or being more creative to achieve the desired result. However, the net result was almost no reworks, happier and loyal customers and more referrals for new work.

Charlie also took a good look at his customer base to understand and identify his most profitable clients so that he could ensure they received premium service. Historically, Charlie had strongly opposed the idea of
discounting because of the additional turnover required to make up for the lost gross profit. But in the current environment he has been prepared to consider lowering his margin if he believed it would assist in procuring a new customer. This was a particularly useful strategy when he had spare capacity on the factory floor or there was the prospect of further work on the horizon. That said, Charlie was careful not to lock any customers into a permanent discounting arrangement, instead realising that sometimes a little sweetener can help move new customers over the line.

Team engagement

In order to get traction on the aforementioned strategies, Charlie said he had to have engagement from his team. Faced with the reality of increasing unemployment, he was determined to retain his employees. Charlie openly
discussed why they’d chosen to implement these changes and the results he was expecting to achieve. He also sought regular feedback from the team on how the changes were working out and welcomed any suggestions for further improvement. He found that by including the team in the process and explaining why the changes were important, they felt valued in the business and were all working in the same direction.

Getting the numbers to work and good business cash flow

The first step was to reduce short-term business debt as much as possible. Charlie was prepared to limit his personal drawings and leave as much equity in the business as possible to minimise his external financial requirements. He believed the investment of additional personal equity was necessary to strengthen up the balance sheet of the business. The flow-on effect was to reduce interest costs to the business. The business is now in a better position to seek additional working capital to fund growth or funding to replace plants and equipment when the time comes.

Cash is the oxygen of any business and, knowing this, Charlie recognised a need to improve the way he invoiced and collected his debtors. He ensured he always had deposits from private residential customers and payment
terms became balance of payment on delivery. For his commercial and trade customers he formalised his terms of trade and documented his collections process. He would initiate contact, ranging from gentle reminders through to referral to debt collectors, allocating responsibility to a reliable team member. Fortunately he never had to refer anyone to the debt collector, a result he credits to the due diligence done on potential customers.

Raw materials inventory management also came under review. Charlie had enjoyed the security of having surplus raw material in the factory – this meant he could take on new orders at a moment’s notice. The reality: this was costing him money by way of the additional insurance, shrinkage and degradation in wood quality as well as tying up cash. Inventory levels have since been reduced without any impact on the manufacturing process.

These strategies provide a stable and prudent platform for future growth. Many of our clients who reduced overheads two or three years ago have subsequently been able to grow their business to pre-recession levels while holding overheads in check. Similarly, the drive for efficiency has meant that many have increased their gross margin above pre-recession levels.

What else could you do to improve your position? Contact your Hayes Knight adviser or call Scott Travis:

T: 09 448 3232

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This article was originally created for Hayes Knight (now Nexia Auckland).