A man I trust (he has been right so often) predicts we may have about two more fat years. Followed by six lean years.
Fat years? Fat years? Yikes, imagine what the lean years will look like!
These past 19 months have been brutal on businesses. Restaurants. Pubs. Airlines. Travel agents. They have been pummeled.
What is the one thing that people do – most often – when things are going great?
They assume the sun will always shine, and they spend more.
This is the worst thing that any business owner can do when times are rockin’ is to add to their fixed costs.
There are six things you can do to thrive during tough times.
Keep Your Fixed Costs Tight
The first thing to do when times are good is keep fixed costs tight.
Go through all your operating expenses and ask which ones are discretionary versus fixed.
What is the difference between the two? Let me explain…
A discretionary cost is something like advertising. Unless you are locked into advertising contracts you can often turn advertising costs on or off.
Rent as part of a lease is often fixed and cannot be turned on or off.
Some wages may be fixed and some not. If you have long-term employees, it would be difficult to just shut them out without severance pay which could be high.
With all your discretionary costs separated from your fixed costs…
Work Out Your New Break-Even Sales
Take your total fixed costs from above and divide the number by your Gross Margin percentage.
Your Gross Margin percentage is calculated by first subtracting your total Cost of Goods Sold from your total Sales. That number is called your Gross Profit. Divide your Gross Profit by your total Sales to get your Gross Margin %.
Here is an example – your Cost of Goods Sold is $30,000. Your Sales are $50,000. Subtracting $30,000 from $50,000 you get $20,000. When you divide $20,000 by $50,000 you get 40%.
Based on your calculation above you determine your bare bones fixed costs are $60,000.
Taking $60,000 and dividing by 40% you get $150,000. That is what your break-even sales must be.
Next, ask yourself this…
Can I Raise my Prices?
In a tough market you will need to be careful raising prices. Is there something of value you can add? Can you add something that would cost less than the price increase people would be willing to pay?
A price increase – with no loss in sales volume – goes directly to the bottom line.
If price increases are not possible, look to….
Can you bundle together other products or services to increase your average sales per customer?
Can you add services to a product that were never added before? An example here would be installation services for electrical products.
Restaurants during Covid use delivery services, like Skip the Dishes, to maintain sales.
Learn to Live on Less
My friend says we have two lean years left before 6 years of famine. These two fat years are anything but fat for most businesses.
Now is the time to eliminate debt, and save, save, save. Live on less.
Bring Supply Chains in Close if Possible
In the West we have become very depdendent on Asia (China, Korea, Viet Nam, India) for manufacturing.
With supply chains being broken in 2021, ask yourself if you can find a supplier within Canada or the USA. If you manufacture, can you start the process of bringing your manufacturing back to Canada/USA?
Six things to do over the next 2 years:
- Lower your fixed costs
- Know your break-even sales. (This goes down as your fixed costs are lowered)
- Raise prices by adding value
- Bundle services and products to increase your average sale
- Cut personal expenses. Live on less.
- Bring manufacturing home
Thanks for reading…