When the economy is moving forward robustly, most executives focus on growing sales. It's only natural. But inevitably when the economy slows and times get tough that focus shifts. Most executives turn inward, looking at how their business is operating, as they face hard choices on how to preserve the company.
As businesses struggle to survive a downturn, leaders generally choose to behave in one of three ways:
- "the ostrich" - preserve the status quo, and just hope for the best
- "the bull in the china shop" - blindly cut expenses across the board
- "the fox" - use the downturn to make your business more effective so when growth returns you'll be in an even better position to move quickly
We encourage leaders to behave "like a fox." Instead of viewing a recession through fearful eyes, use it as a means to pounce on emerging trends - and to get lean, mean, and in a position to crush their competition as economic conditions improve.
Here are ten "secrets" you may want to consider as you deal with our current economic climate.
Secret #1. Really Monitor Non-Payroll Spending
An average business does a poor job of tracking how much money it is spending on non-payroll expenditures. There's just too many other things to do. So most businesses use the reporting from month-end close to track what's already happened. But by "driving their business from the rear-view mirror" all too often there are nasty surprises.
One of the best ways to begin recession proofing any business is to get spending under control. And one of the best ways to get spending under control is to monitor it more closely. Increased oversight on spending immediately begins to alter behavior and deter a business from spending frivolously on items it doesn't really need, or spending more than it has to on items it does need. In addition, monitoring encourages employees to exercise prudent fiscal discipline and compliance to (often unwritten) spending policies.
Monitoring spending also inevitably leads a business to examine its policies. Who is allowed to purchase goods and services in the first place? What signing authority should managers have?
Examination of spending policies is a great first step towards cutting costs in ways that don't negatively impact your business operations. By beginning to understand all your non-payroll costs, you can start detecting and curtailing wasteful spending while continuing to fund the business' many necessary expenditures.
Secret #2. Establish and Enforce Budgets
Most government agencies and higher education institutions have used budgets to operate for a long, long time. These organizations would be quick to point out that managing to a budget isn't perfect. For example, managing to a budget carries the downside risk of a practice called "budget flushing" where managers rush to spend all they've been allotted to ensure next year's budget is just as juicy. But managing to a budget also carries the very positive upside of ensuring your business does not spend more than it should. And in tough economic times that's more than enough benefit to make the investment in budgetary planning worthwhile.
Without a budget, there's nothing to stop an employee from spending $1,000 on a new printer when a $500 printer would do. Without a budget, it's too easy to rationalize the more expensive purchase and not examine the opportunity cost implicit in consuming funds that could be directed elsewhere.
The best way to start is to review the last 12 months of non-payroll spending and set budgets at 10% below those levels. You may find that you'll want to modify the "buckets" of spending you want to budget against, so make those adjustments as needed. Then establish a process to account for spending against each budgetary "bucket." Quarterly periods for establishing budget amounts are a good way to start.
Plan on adjusting budgets early and often as your organization gets used to the new fiscal oversight. You may find some budgets can be safely set to 20% or more below what you spent last year. And depending on how fast the economy recovers, you can begin to set expectations that budgets for non-payroll spending may continue to tighten in the future. After all, every dollar you don't spend goes straight to your improving bottom line.
Tune in next week as we continue with our series with suggestions on curbing non-essential spending.
Have a Great Week!
Jerry
