It’s important to note that the goal with any financial improvement is to implement “structural changes”–that is, whatever changes you make must not be temporary, like negotiating with one of your vendors for a one-time deferral or a payment holiday, but permanent, which will help your business generate more money in the long run.
This could be either a reduction of an expense, an enhancement to your efficiency so that you can produce more with less, or perhaps a way to improve your collections process. Whatever it may be, it is something that helps you go to market or sell with a magnified return. That’s the goal.
I can already hear you saying it: Are you crazy? Do you realize what’s going on in the world? We can’t raise our prices right now.
The truth of the matter is, if you have limited capacity to produce and more demand for your product or service, you need to take that into consideration and adjust accordingly.
We’ve worked with different businesses from service firms to manufacturers that have been able to raise pricing from a few percentage points to in some cases 20 percent or 30 percent. Now, these price increases are done intelligently. We look at our clients. We look at their customers and we put them into three buckets–A, B, or C.
The best customers–those that yield the best margins, pay the fastest with the least hassle, and are most enjoyable to work with–are in the A bucket. These are strategically the most important customers, so their prices aren’t raised. The pricing is raised, however, for those in the C bucket, those who are only marginally profitable and are often susceptible to scope creep that cuts into margins even more.
Why would you want to work with somebody and use up your capacity on clients and customers who don’t make you money? That’s not fair. That’s not a good relationship, so these are people you can raise pricing on.
2. Improve Your Collections Process
The second way to enhance your margins is to collect more of what you’re owed faster. Especially in a situation like we have right now, your collections process is a big deal. One medical group that we work with serves hospitals and does staffing for hospitals. They had quite a bit of receivables built up when we first started working with them.
We changed their system so that they have weekly reviews on receivables. We frontloaded the collection effort so that if a client was behind, there was a phone call to the hospital administrator or, depending on the client, the CEO or CFO, which brought the problem to their attention sooner.
In many cases, if a hospital got too far behind, it was put on a payment plan that was no longer monthly, but weekly, so that the amounts to be collected were smaller and if there was disruption with that payment collection stream they would find out about it a month earlier. So take a look at your collections and see what adjustments you can make to the process.
3. Reduce Non-Strategic Expenses
Strategic expenses are the things that you spend money on that produce or protect revenue. They’re things that give you important efficiencies that let you run leaner.
Non-strategic expenses are pretty much everything else. They would include things like salespeople who are not selling. Marketing activities that simply aren’t working. Extra staff you don’t really leverage very well. It would include the cost to produce certain reports that no one’s using or even looking at.
Things that you could do without, without missing a beat. If your business is the same or better without that expense, then that’s a good expense to cut. If without the expense your business is less–has less capability, less result–then that’s a bad expense to cut.