Mark Zweig offers five suggestions on how to stay out of trouble and in the black.One of the greatest challenges is keeping your business profitable. It’s easiest when you’re growing. Revenue is going up faster than expenses. Under that scenario, cash may be strained but profitability is very likely.
When the growth slows, or when a large investment goes sour, profitability can evaporate quickly. Unfortunately, we in the A/E business have a bad tendency to not react quickly enough. If we’re lucky, we’ve got a business with a strong enough balance sheet to weather the storm. If not, we’re screwed.So how do we stay out of this trouble and stay profitable instead? Here are my thoughts:
- Watch for danger signs. The predictive metrics are where you need to focus your attention. The majority of firms still don’t use these! Incoming web hits. New opportunities learned about. Proposals made. Sales. Backlog. Cash flow forecasting (not cash flow statement). These are the things that show you what’s going to happen versus what happened. And for those firms that insist on tracking cumulative data (such as total proposals made) and tracking it graphically versus monthly data – STOP doing this! You are misrepresenting how well you’re doing.
- Act on the information you receive. We all want to believe we don’t have a problem. It’s human nature. On top of it, the managers who report to you are people you want to support and it’s easy to let them do what they want. But if you want to stay profitable you have to act quickly. It takes a long time to make up losses – a very long time.
- You take the hit yourself. If cuts have to made, look at the top, first. Owners must be the ones to take them. Of course, dead wood and unnecessary luxuries should always be cut out first.
- Cut harder than you think you need to. It’s rarely enough. Unless you can cut deep enough that a profit is assured, you will possibly be facing a downward spiral of cost cutting – always too little and too late. Make is so you know, for certain, that a profit is assured.
- Build up a reserve. Saving for a rainy day applies to your business as well as your personal financial management. Don’t live in your line of credit. There’s no safety net then. And you will need a safety net some day; not to mention that your bank doesn’t want that line of credit to be permanent financing. Their response will be that you need more equity.