Nikole Dickman and Jessica Candler
Given all of the changes that have occurred this year, analysts are naming the future the new “never normal.” This indicates that we need to be prepared to react quickly to change and accept that a new challenge is always a possibility.
We see this as the perfect time to challenge yourself to think outside the box and analyze dynamic approaches for long-term sustainability, especially when it comes to your business financials!
Let’s explore the concept of “ELASTICITY.” How can you structure your finances to be as flexible as possible when your revenue expands or contracts quickly?
Here we present five broad financial principles of the Elastic Cost Structure that can help get your business prepared:
No. 1: Deconstruction
Deconstruct everything: Forget all the old ideals on business accounting and get ready to look at everything anew. Analyze all of your business relationships and examine what works and what doesn’t.
- How is your relationship with your vendors, customers and creditors? Can you rely on each other and dig deep together to solve issues? How have you interacted these past months to work through issues?
- Do your processes work well? What manual tasks are a time-drain? Are there tasks that are more complicated than they need to be? Where is time wasted and what needs to change? What technology tools can you adopt to make things easier?
- Look at every bill and think about how that expense has contributed to revenue during the past year.
- Analyze your products and services – what works well and what generates revenue. Think hard about the value you bring to clients that may not be captured in your revenue and decide if there are value-added items that you can monetize.
Have an open mind and challenge conventional thinking!
No. 2: Variability
Variabilize Costs: When costs can flex in response to an expansion or contraction of revenue, they are variable. And variable costs are more easily manuevered.
Traditional thinking categorizes some costs as “fixed” and not easily changed. This, too, can be changed.
Start by identifying what you believe are your fixed costs and challenge that thought. Could these costs be transitioned to a “blank” as a service model, subscription, lease or other flexible options? Rely on those vendor relationships that you analyzed in the Deconstruction phase and work together to explore variable options. This is the time to make sure your vendors and supplier relationships are mutually beneficial.
Variabilize Workforce: Take a thoughtful look at yourself and your team and be open to ideas that will allow for growth. Take traditional cross-skilling up a notch and find opportunities for “Up-Skilling.” This involves training aimed at making team members more skilled and efficient, therefore freeing up time to spend in other areas of the business.
No. 3: Zero-Based Approach
Zero Your Thinking: Discard previous ideas about budgets and decide to see them as a positive tool. Budgets are not a four-letter word! Zero Based Budgets, also called the “reality budget,” give you the ability to spend the funds needed to achieve business goals versus the traditional approach of allocating funds based on previous spending. This allows for flexibility in spending and addresses real-time situations.
- Identify your business goals and decide what activities must be accomplished to achieve these goals.
- Carefully estimate the funds necessary to support these activities.
- Plug these expenses into your budget and give yourself permission to spend the funds necessary to achieve your goals.
No. 4: Liquidity
Maximize Cash: Create liquidity so you can access cash, optimize cash flow and build a reserve. This sets your organization up to be sustainable through dynamic situations.
- Understand your working capital requirements … or how much money you need to operate. This includes reviewing how quickly you get paid and how fast you need to pay suppliers.
- Work with vendors to adopt terms that allow you to pay as far in the future as possible. Negotiate!
- Work with customers to receive payments as quickly as possible. Consider discounts for early payment, pre-payments for services, and banks of hours for services.
- Prioritize building a cash reserve – an emergency fund – to cover expenses when uncertainty hits. Aim to set a fixed percentage of profits aside each month until several months of expenses are in reserve. Make sure these funds are earning interest.
No. 5: Financial Health
Constantly Re-assess: Analyze, adjust and review your organization’s financial health consistently to maintain elasticity and give yourself the permission to spend.
Keep in mind that establishing and implementing these approaches will ensure your business is well positioned for any future un-normal.
Nikole Dickman and Jessica Candler are oo-owners of Envoy FSP, a Fort Worth company. They can be reached by emailing nikole@envoyfsp.com or jessica@envoyfsp.com. To get started on their Elastic Cost Structure, find a detailed free E-Workbook at www.envoyfsp.com.