Dec 4, 2016

Who said our job is not to make profits? Bah humbug!

I fear the symbol of Christmas this year for many companies should not be Santa Claus, but Ebenezer Scrooge. All sorts of industries are experiencing the worst margin squeeze for more than a decade. In such circumstances, I believe the only approach is to bear down on costs with the abstemious approach of a Victorian miser.

I recommend that every finance director receives as a seasonal gift a handy paperback called Double Your Profits in Six Months or Less, by Bob Fifer. I give out copies liberally. Finance departments should adopt it as their Bible to tackle these challenging times. It contains some of the best advice I have ever read about the tough matter of saving money — and, in the process, saving businesses and jobs.

In sectors I know well, such as hospitality, there are severe inflationary forces at work — many of them generated by our government, which seems to punish enterprise and success with its legislation, despite its rhetoric about supporting entrepreneurship.

These attacks include the ever increasing national living wage and national minimum wage; the monstrous increases in business rates; additional employment taxes, such as the apprenticeship levy and auto- enrolment pensions; as well as the growing cost of imported goods, because of the weakness of sterling, and rising rents.

Companies tend to get flabby and out of shape during the good times. To cope with the headwinds of 2017 they will need to go on a diet to get financially fit. The truly self-indulgent businesses, and there are quite a number out there, will find the rigours of such a regime a very painful adjustment. Being frugal is a state of mind — almost a philosophy of life.

In organisations that have grown fat on easy money, and gentle expectations, there may be strenuous objections to even the idea of reducing overheads or headcount or using cheaper suppliers. Such objections must be addressed head on and defeated. Otherwise, like with heart disease, the sclerotic arteries will fur up with waste and excess and the organism will have a cardiac arrest.

Fifer’s book offers “78 ways to cut costs, increase sales and dramatically improve your bottom line”. Of course, only some of these suggested actions will apply to any individual situation. Certain ones are more appropriate for a company in crisis, and facing the possibility of going bust. Others are for a business that is simply stagnating, rather than failing. But all 78 contain common sense and insight.

The first point the author makes is that you need to revise the culture if you want to fix a struggling company. That means, for example, that you should adopt Step 5: Never Apologise for Focusing on Profits.

In the 21st century, lots of well-intentioned experts tell company owners they must consider all stakeholders, and the purpose of business is not really to make profits. This is utter crap. A business that does not seek to grow its bottom line and make an appropriate return on capital is likely to drift and go wrong. Such cuddly attitudes do not survive a downturn.

Companies that do not generate cash cannot invest, innovate and hire. In a sense, businesses are like great white sharks: either they are making forward progress or they are dead. And only live businesses are any use to society as a whole.

Another vital message from the book is Step 12: A Sense of Urgency.

The author states: “A stubborn impatience to do things now is a powerful producer of profit.”

Procrastination and endless delay about critical issues lead to decay and doom. There will be a thousand excuses why costs cannot be shed. Just ignore them and plough ahead. There is no room for embarrassment, sentimentality or squeamishness. When the very existence of a business is threatened, everything should be focused on just two matters: boosting sales or eliminating costs — all else is superfluous.

The writer really gets into his stride when dealing with cutting costs. As he says, no cost is too small to worry about. From suppliers to landlords, from personal expenses to research and development, from capital expenditure to advertising, from bonuses to outside contractors, no stone must be left unturned in seeking efficiencies.

The status quo will not do: a business that breaches its banking covenants must adapt violently, or face the grim consequences of mismanagement and denial.

I have sat on countless boards over the years, and seen complacent managers ignore alarms bells and neglect to adopt emergency procedures when the warning signs are obvious. Many leaders lack the resolve to force their companies to adapt to changed conditions. Others have never commanded an organisation through difficult economic phases, and have no understanding of what it takes to prosper during hostile periods. Still others are congenital optimists, incapable of battening down the hatches and doing more with less.

My end-of-year book recommendation will prove a wise investment, and a wake-up call to lots of company bosses. It will help people concentrate on results rather than process, and act as a reminder that profits are where it all starts and ends.