Business Survives on the Bottom Line

If you’re going to survive in business you need to make a profit—a fact surprisingly often forgotten by entrepreneurs.

They become so fixated on turnover that they overlook extra costs that can erode profitability, such as such as rent, electricity bills and advertising. Too easily they end up making panicky calls to the bank at the last minute.

Navigating your way through a recession means being obsessed with the bottom line. And if you anticipate problems, it means talking to your lenders at an early stage.

These are the basic rules, says Andy Berrow, regional manager, BusinessLink, central London. You need to stay profitable. “When the going gets tough, some companies are bound to go down. You want to be there to step in and take the business.”

This may mean having to drop products or switch markets. And you should take account of any soft benefits you provide. Authors Tom Davenport and Jeanne Harris cite the example of a cap-wearing chauffeur waiting patiently at the airport, who comes as part of the travel deal. “Consider dispensing with the chauffeur, or charging like the ‘no frills airlines’, which have identified the ‘perceived value’ in what they are offering and have boosted revenue by attaching a price to it,” they suggest.

Predictive modelling software helps identify the most profitable customers, those with the greatest profit potential, and the ones most likely to cancel their accounts. Software can also be used to analyse historical sales and pricing trends to establish prices in real time and get the highest yield possible from each transaction. Such techniques are used by some of the world’s most successful companies, such as Harrah’s, the US casino group, and Tesco, the UK supermarket chain.

A rigorous profit analysis may also persuade you to change strategy, so be open minded. A favourite saying among venture capital investors is: ‘I’ve made more money on plan B than I ever made on plan A.’ Combine tenacity with a willingness to change course. Be ready to diversify, come up with products your rivals haven’t thought of, and be creative on pricing.

One recruitment company cited by Berrow switched to focusing on short-term placements rather than fixed employment. The change was reasonably easy because the business was similar.

Another recruitment consultancy had a prestigious office that cost about £2,000 a week. Now staff work from home and meet people in nice hotels where tea for two costs a few pounds. “You need a plush surrounding when you’re recruiting people earning £200,000 a year, but the reception area of a smart hotel works very well,” says Berrow.

It’s about realising what you’re doing at the moment that isn’t working and what you could do that would use your existing skills, avoiding lots of retraining and changing of business processes.

Crucially important is to stay focused on the need you satisfy. John Thompson, chairman and chief executive of Symantec, admits his company hasn’t always followed this advice. “One of the things I think may have caused Symantec to veer off the path in the 1999 to 2001 time frame was a preoccupation with the business model as opposed to the business need that we were satisfying,” he says.

To help focus on customer needs you should gather as much information as possible. It may be helpful to use a STEEP analysis (socio-cultural, technological, economic, environmental, and political). This takes into account a wide range of customer characteristics from age, income, gender, ethnicity and lifestyle, to finance, sustainability, health and safety.

Thinking about customer needs, and moving into new, related markets, proved successful at Honda Motor Company and Hero Cycles. In 1983 they had the foresight to develop a motorised two-wheeler with unmatched reliability and economy for the Indian market. By 2001 it was selling 320,000 a month.

Similarly, Nike began by specialising in shoes for elite distance runners though it is now known as a broad-based athletic footwear, equipment and clothing company. It was able to enter one market and use its success in that as a springboard for expansion in other segments.

Adam Arnold, chief executive of SmarterHousing, is also beginning to achieve success by breaking the mould. Graduating in 2005, he spotted that university students in Warwick and Coventry were poorly served with housing rental. Rather than take up a graduate traineeship at KPMG he set up internet-based SmarterHousing. Most of SmarterHousing’s rental agreements are signed at least eight months in advance, so its percentage-based revenue is accurately predictable. Outgoings, at about £2,500 a month, are less than one tenth of local high street estate agents, and the company has only two employees in addition to Arnold.

Some local estate agents have branched into rentals and gone online, but this is an additional overhead for them, says Arnold. Now he’s planning to steal more of their market by diversifying into house sales. “The downturn in housing is an opportunity for us because we can mop up houses that others can’t sell.”

SmarterHousing is a low cost operation with no debt. But for those less fortunate, it’s crucial to keep in touch with your creditors. Sometimes businesses make the mistake of thinking that because they are owed more than their overdraft, there isn’t a problem, says Berrow, who was a commercial bank manager with Barclays for 25 years. “Typically the overdraft is growing while the money they are owed is diminishing.”

Another problem is that entrepreneurs are impatient—they want to get on with the action rather than sit down and think. “It’s like planning your own funeral, lots of people don’t want to do it,” says Berrow. People tend to delay in the hope that something will come up.

“Banks don’t like surprises, says Berrow. If you want to increase your overdraft to pay the wages tomorrow you won’t get the same response as if it’s for next month.”

When you are already in a crisis and haven't provided any warnings, situations may prove tricky, says Berrow,. “Its not worth taking the risk because if you can’t pull a rabbit out of a hat the situation will be worse than if you had flagged up the issue earlier.” And if you’re rushed into raising cash in a tight time-scale you might take bad terms, for example giving a customer a 20 per cent discount for immediate payment.

On the other hand you don’t want to tell your creditors too much, for example that you’ve saved £50 a month by switching your supplier of paperclips, in case they start interfering in how you run the business.

Try to build a personal relationship with your bank. Look for feedback and rapport, phone and ask if your bank manager received your management accounts and what he or she thought of them. Most important of all, if you make promises, keep them. As Berrow says: “You only get one chance to break a promise.”