For many businesses cashflow will be tight in the coming months as consumers and other businesses spend less due to the combination of:
higher interest rates,
Impact of Ukraine war on freight, fuel etc
supply constraints – gib, steel, timber etc
inflation – commodities eg copper, council rates, insurance, food prices
a tight labour market – young people heading offshore
stressed developers / contractors and their businesses failing, and
Omicron’s impact on foot-traffic count = lower sales, and sickness =labour shortages = lower productivity.
The emergence of inflation or rising expectations of even higher interest rates is a wakeup for businesses; containing inflation is not growth or asset friendly over the coming years.
Economic conditions are changing. ANZ’s Business Outlook Survey is reporting a net 27-33% of firms are expecting lower profits over the coming year. Costs are the big issue.
In an environment where economic conditions are evolving, firms need to adapt quickly, protect, or if possible, improve profitability via reducing costs, but at a minimum, protect the downside. Like a Gazelle business needs to be alert, fleet of foot and able to change direction instantly to escape the Cheetah, every hour of every day.
Sales – Cost of Sales = Gross Margin (after direct labour and materials) or Contribution Margin
Contribution Margin– Overheads = Net profit or loss before tax.
If your Gross margin is 40% and overheads are 38% then you are making net profit equal to 2% of turnover. This is a marginal business.
Does your engine fit the frame it is trying to move?
Your Engine is your Contribution margin – how can you improve it?
Your Chassis is your Fixed Costs or overheads. An overweight or underpowered gazelle doesn’t survive!
There are 6 ways to improve profitability :-
raising prices – vital to passing inflationary costs on,
lowering variable costs,
increasing volume (difficult but not impossible in this market),
reducing fixed costs = overhead, and
turning inventory faster – think Michael Hill vs the historic high street jeweller
A boat with a dirty hull goes slow – by working on these 6 areas you can get your engine running efficiently on all its cylinders with minimal drag.