Don’t let a temperamental business cycle cost you your business. Make sure you understand your key operating performance measures – attainment and profitability.
All businesses go through cycles of growth and contraction, often in line with the economic cycle operating within their sector. Businesses that do best are those that are nimble and flexible enough to optimise their response to changing market conditions.
Some cycles are short term and pass quickly but others are longer term, reflecting changes in buyer sentiment and the advancement of technology. Some changes are the advent of a new state that will never change back. 5 million Australians do not have a fixed line phone anymore. The march of mobile technology along with the sheer convenience and affordability of mobile data indicates that fixed lines will never be universal again.
But most businesses grow and shrink as the economic climate grows and shrinks. How can we best position ourselves to prosper as these cycles come and go?
To do so, it’s important to understand 2 key operating performance measures
1. Attainment: Keeping your customers
When the business cycle is in a growth phase, attainment becomes the key driver, as it is how you win and retain customers and grow your top line revenue. In a growing business cycle, prices tend to be high enough to forgive inefficient production because margins tend to be higher. Growing companies, particularly start-ups, lack the systems and structures to control their operating performance but it’s manageable because margins are good.
This is best demonstrated in the resources sector where, when prices stay high for long enough, companies will open quite marginal mines because they are profitable. When the cycle turns however, as it did in 2012, it was the high cost mines that closed first as the sector contracted.
2. Profitability: Servicing customers productively and profitably
Profitability, efficiency, and productivity become far more important as the business cycle turns negative. It’s great to grow your business but the most dangerous time occurs when the cycle turns.
An early indication of the cycle turning is a flattening of demand. This can come about as growing demand and high margins attract new suppliers into the market, and because customers’ wants and needs change over time. In the 21st century, the digital revolution is changing everything and it impacts every business sector in our economy. And then there is the overall economic climate driven by business and consumer confidence in the future. At this time, Australia’s economic outlook is laden with uncertainty.
4 measures for navigating the business cycle
These measures should be taken in the face of weakening demand and uncertainty about business conditions in the future.
- Never, ever postpone action on profitability. As your business grows and you focus on customer service issues, pay real attention to the things in your business that cause waste and cost money.
- Maintain customer service as your primary deliverable. The fastest way to become unprofitable is to disappoint your customers.
- Quality must never be compromised. Product is obviously a business’s foundation, but remember that its quality is defined in terms of the customers’ expectations, not yours.
- Poor cash flow is the biggest killer of businesses. Undercapitalised start-ups may fail because of this but if a long-standing business fails through lack of cash after an extended period of prosperity, it means poor management. Times of growth are when you build resilience into the business so that it will survive hard times.
The ‘quick death’ and the ‘slow death’
These 2 performance measurements, attainment and profitability, can be described more colloquially as the ‘quick death’ and the ‘slow death’ and when they come into conflict, I recommend avoiding the quick death. When faced with an operating challenge, choose attainment over profitability. This retains the customer and gives you time to deal with operating problems that caused you to spend more time and money than you should have.