You have to understand your numbers in business in order to survive but which numbers mean the most when it comes to decision making and the role of the middle man. This is part five in my series of blogs on how we can learn so much for business in general from the dairy industry.
As outlined in my previous blogs, knowing your market and the roles of the middleman the end customer will increase your business self-confidence. Now I’m going to add to this by beginning to understand the numbers that underpin your business health.
Most markets are cyclical, and, even though markets go up and down over time, sitting around and waiting for the market to return to profit is a bad idea (unless you can still make a small profit or break even – but the risk is great). The problem is that you don’t know how long it’s going to take for profits to return and whether you will last that long. Keep in mind that it’s in others best interest (e.g. Fonterra) to be positive to avoid any ‘panic’. Therefore it’s not uncommon to hear lots of positive talk but not see any real action. Relying on what they say without verifying it for yourself (from independent sources) is a bad idea.
The only way a market can go up (when it’s currently down) is if supply drops or demand increases. A drop in supply can only happen if enough people leave the market (sell up or are forced to wind up, liquidate or go bankrupt). Demand only increases with the development of new markets or products based on what you sell. This will take time if your market is global. And whatever you do personally isn’t likely to change a global market with thousands of businesses. You need enough businesses to collectively change to start changing an entire market.
We’ve seen some business owners decide to increase their product range when times are tough in order to try and sell more. It can be surprising to find out, that selling more can be just as bad as walking a tight rope without a safety net. It’s going to hurt if you fall.
We have seen other businesses cut costs to try and survive. The problem is they don’t realise the costs they cut may alter the quality of what they sell, which impacts on customer demand and price, ultimately increasing losses.
The simple problem here is not knowing your numbers.
Lessons:
- First, stop doing nothing and hoping everything will come back to normal. If you aren’t doing anything then you won’t be changing. That means you won’t be helping to change the market that’s hurting you AND you won’t be ready when the market does finally change.
- Don’t automatically sell more and/or cut costs unless you know that will help you. Understand your numbers – how much it costs you to sell what you sell. First know the costs that never change (other than inflation) no matter how much you sell. Then the costs that are directly related to what you sell (i.e. they go up or down depending on how much you sell).
Get help if you aren’t sure. You need to know which costs are important to your business and which aren’t before you start cutting them.
Stop basing this year’s costs on last year plus a bit for inflation. Go back to basics and look at what you need to make and how you can make it from what you have. Look at every cost you have, make sure it’s important and links to the income you need to make. Times have changed and there may be better/cheaper/more efficient ways of doing things now. Get help if you need to.
Do you need help with understanding your numbers? We can help you.
By now there should be clarity on the key aspects of being business confident. However, having a couple of plans up your sleeve is always a good thing and this is the subject of the last writing in this series.
