Panic must give way to planning

Develop your ability to manage and shape your business

There is no longer a debate about whether we are heading for an economic slowdown ­- because it is already happening.

But don’t panic. In any market, no matter how horrible, there are always some firms doing well. Develop your ability to manage and shape your business, and it can do well too.

First and foremost, make sure you are not paralysed. The tendency to freeze is a natural response when faced with an uncertain but probably unpleasant future.

However, you must recognise it can be fatal to just carry on doing what you have always done with fewer resources. Instead, you need to reshape the business in an intelligent, considered way.

Understand where you really make your money. Any business is made up of parts, some of which are great and some of which drag down profitability. Normally the average of both parts is fine ­ but when things are tight, you need to dig deeper.

One of our clients undertook an analysis and found a major contract was actually running at a 20 per cent loss.

If you can’t grow revenues or increase prices, you can still protect your profitability by removing needless encumbrances. Try looking at your customers and products in four groups, based on size and profitability.

If a customer is large and profitable, love it to death. Make sure that it is not just happy, but ecstatic. Assume that your competitors are constantly sniffing around these customers, and be sure you give them no reason to look elsewhere.

If a customer is small but profitable, take good care of it. Try to grow the business, make sure it is happy and try to find similar clients.

If a customer is large but not profitable, find out why and put it right. Finally, we have the case of the small, unprofitable customer.

Have a frank discussion with such clients. It is important to explain that you are losing money and that the company should either agree to a substantial price rise or the end of the contract.

Establishing which deals should be ditched is likely to be quite a test for your finance department. It will need to give you the information to make appropriate decisions.

But once you have dealt with the hidden hindrances on profitability, there are more ways to create problems -­ and many companies continue to chase sales at the expense of profit. Look at any incentive schemes you have, but also listen to the way people talk about the business.

A divisional manager of a very successful timber company told me about one of the areas that distinguished his company from its competitors.

The manager said his people would concentrate on profitability per cubic metre, rather than on how many truckloads of timber had been sold. You must ensure profitability is similarly prioritised.

Finally, do not stop innovating. The last place you want to be in a tough market is in the role of the commodity producer. Product innovation sustains the long-term future of the business.

Alastair Dryburgh is chief executive of Akenhurst Consultants