Managing the budget in a downturn

Running a business or a department can be daunting. However, a few simple techniques can make it more bearable.

In business, you always need to keep an eye on costs. However, in a downturn this is even more important as sales may fall faster than you are able to reduce costs.

Remember the old adage, sales are vanity, profit is sanity.

This post describes how to manage your budget in a downturn.

Race don’t chase the budget

When sales start to fall you can fall into loss very quickly if you are too slow to reduce your costs.

Start early and race to reduce costs at a faster rate than sales or funding declines will achieve a positive contribution to the bottom line.

Chasing the budget when sales are falling at a faster rate than costs is a recipe to disaster. If costs aren’t addressed quickly, then the impact on cash and the bottom line is marked and unsustainable. If left to continue there is only one outcome, which is why it’s called the death spiral.

The secret to managing costs

The secret to managing costs is to know the budget perfectly. The budget is not the responsibility of the finance department or the accountant if the business is small. Not everyone has sales in their budgets, so everyone must learn to manage costs.

Everyone must have budget responsibility down to the lowest possible level

With apologies to Erasmus :

“In the land of the blind, the one eyed manager is key – they’re no short cuts”

In other words, there is no substitute for knowledge.

Study, analyse and learn the budget – spend time and block it out in your diary, you can’t delegate this responsibility.

The secret to managing costs

Most businesses have the capability of providing good profit levels, but just where does profit come from?

1.  Leads                                    (Sales enquiries, prospects. or potential customers)

2.   x Conversions Rate             (Percentage which actually convert to an order)

3.   = Orders                                     (Number of sales orders)

4.  x Repeat Business                        (Number of times a customer places an order)

5.  x Average Order Value             (Average sales value of an order)

6.  = Turnover pa                         (Sales turnover of the business pa)

7.  x Gross Margin                         (Percentage of the business that is profit after cost of sales)

8.  = Gross Profit                         (Gross profit before overheads)

9.  x Overhead Margin             (Costs not directly product related)

10. = Net Profit                         (Profit before any interest, tax & depreciation is considered)

Any activity which improves, 1 Leads, 2 Conversion Rate, 4 Repeat business, 5 Average Order Value, 7 Gross Margin and 8 Overhead Margin produce a significantly better profit level. Just a 2% individual improvement will actually increase profits by 15%.

Just think how good you would feel next time you talk to the bank!

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