What can and should companies be doing to survive? Read Barry’s CoStar Guest Column…
A recent RICS survey asked people running small property companies and professional services firms to rank the challenges they faced. Before branching out on my own this year, I spent the last 15 years as a partner at PwC helping companies in distress to survive by reducing costs or to increase profits, so I found this fascinating.
Let’s take a look at the results. Some 41 per cent cited cashflow as their biggest challenge, 19 per cent access to contracts, 11 per cent red tape and 10 per cent bank support. The rest were myriad smaller issues.
From a cursory glance, what do these stats tell us? Firstly, that money is very tight (neither news, nor rocket science). Secondly, that it is hard to find work, whether from existing or new clients (ditto). Thirdly, that bureaucracy makes life difficult (probably true for most organisations regardless of size). The list also showed that working capital is not, perhaps, as big a problem as many commentators consider it to be…however, some may have confused cashflow and working capital. The former is the actual flow of cash in and out of a business, whilst the latter is the actual stock of money to which the business has access so that it can operate.
Focussing on cashflow has long been a lesson learned the hard way by many entrepreneurs, partners and directors of businesses of all sizes. History reminds us, through phrases like ‘penny wise, pound foolish’ or ‘look after the pennies and the pounds will look after themselves’, that the statement ‘cash flow is king” is very hard to dispute. These epithets may not be much comfort to a company in trouble, especially where (with the benefit of hindsight) the company got itself into financial trouble by spending too much when times were good. Such spending may have been on big salaries or excessive dividends, on new offices, on fancy cars or smart new IT kit, or simply living the good life – on expenses. The bubble was always going to burst, it was only a question of when.
So, what can a company do to reduce the burden of its overheads? Any company can look to that list of possibly excessive expenditure, and prune them to a minimum. That is obvious, but what next ? One of my philosophies has always been that any company can, if it wants, shave 10 per cent off its overheads. For example, professional services firms often have their wage bill at about 60 per cent of turnover. Not surprising, you may say, because they don’t make a product, but only have their people as their most valuable asset (and cost). True. However, a target would be to get employment costs down to 45-48 per cent of turnover. This is real cash flow, as the wages have to be paid every week or every month.
Another, relatively easy win, is to cut out the fripperies; take clients (or potential clients) for coffee or a sandwich, not a slap-up lunch. People won’t think any the less of you. Really. In fact, they may admire your prudence. Downsize your company car. Park free on the street not in a pricey car park – the extra walk will do you good. Do you really need smart offices in the centre of town? Could you be more creative with your location, and therefore lower your property costs?
Inevitably, if these savings have already been successfully implemented, then cutting the second 10 per cent cost reduction will be harder. This is when you have to cut into the muscle, rather than simply trim the fat. This means salary reductions, especially for the owners or directors, who must lead the way. Their shoulders on the wheel will encourage others. It takes focus, concentration and effort, just as it does to ‘work smarter’.
Whilst it is difficult to avoid bureaucracy, following a simple rule like ‘touching a piece of paper only once’ will get things done sooner, quicker, and more efficiently than regularly shuffling the difficult stuff to the bottom of the pile, whilst also taking up valuable time to worry about how to comply, or to effect the change. It might not be obvious how this action cuts costs, but it saves time – and your time, and your staff time, costs money. Putting off working on the stuff that is too difficult is actually more time-consuming that you might imagine. We had one example a few years ago where the finance director was made redundant. He cleared his desk, but failed to empty all the drawers, where we found four years’ worth of difficult letters, demands and unpaid invoices.
Smaller things: turn off the lights when not needed; fit movement sensor lighting and energy; do you really need air conditioning?; get your news online, and stop buying hard-copy newspapers and magazine; make notepads from the blank side of used photo-copy paper; maybe (and this may not be too popular) you should talk to your landlord about re-gearing your lease – a longer lease on a lower rent might be more appealing to your landlord than no rent (and empty rates) if your business fails. Be ingenious., but do not be deceitful.
Don’t be afraid to share, listen and learn. You are not alone. Ask others in your network how they have made cuts, how they have saved money and how they have protected their working capital. Never be too proud to ask. Remember ‘pride comes before a fall’.
Ultimately, any business that is successful in this market will be looking at every way possible to save money, in the short, medium or longer term. All the smaller cuts really will make a difference: survival is key, and if it takes 10, 100 or 1,000 small cuts to survive, then just do it.