How to Run Operations in Your Business That is Profitable
How important is operational efficiency? It can cost a company the equivalent of 20 to 30 percent of revenue annually, according to global market research firm IDC.
Imagine for a moment the impact of 20 to 30 percent on your recent financial statement’s bottom line. For most executives, even a 5 to 10 percent increase would be more than welcome.
We live in an era where the business environment is ever-changing, unpredictable, and challenging due to the global nature of today’s trade. Adding to that are economists predicting an end to the slow, steady growth we’ve experienced since the Great Recession of the late 2000’s. With a possible pullback on the horizon, it’s important to analyze your company’s cost structure and operational inefficiencies before a downturn hits.
Think of it as a tune-up to make an organization lean by setting up an operations Centre of Excellence (CoE) and to prepare a strategy to weather a pullback. A strategy to not only prepare for a downturn but to be able to take advantage of opportunities while your competitors are struggling to survive.
Steps to Efficient Operations
Data Analytics
In our digital world, companies are sitting on a goldmine of unstructured historical information. In its unstructured format, it offers little benefit to decision makers. But by extracting and cleaning the data into a structured format, executives are given in-depth visualization into their company’s financial history. You can review historical upturns and downturns and see how key performance indicators (KPI)
reacted in the past. Predictive analytics can then be used to forecast future results based on varying economic conditions.
Many small and medium market executives mistakenly believe that data analytics is a strategy for large corporations. In fact, large corporations are more difficult to data mine due to the sheer volume of information. Data analytics may favour small and medium-sized business with the lower volume of data.
Another concern of small and medium market executives is that the cost of data analytics is prohibitive as well as disruptive to the organization. It doesn’t have to be. The best course of action is to narrow the focus to begin the process. If your goal is to streamline operational processes, then start there and develop your most important KPIs. You can then scale up as you receive tangible results.
Financial Modeling
With your past financial data mined and structured, you can then use predictive analytics to forecast the future. If your company history goes back to previous recessions, you can use past KPIs to predict what may happen in a future pullback. This type of scenario planning will help you develop a strategic plan based on varying future economic conditions.
While your competitors are scrambling to react to a changing economy, your streamlined operations and scenario-based strategic plan put you in a position to not only weather the coming storm but take advantage of opportunities that they can’t afford to take.
It’s also important to analyze the profit or loss of every product and service you offer. If you don’t have a cost accounting system that allocates the operational costs to each product and service, now is the time to implement one. If a product or service isn’t contributing to bottom line then you can consider whether to reduce its cost, drop it as a product line, or raise the price. It’s much easier to raise prices when the economy is good than in a downturn.
Plan Short- and Long-term Strategies
With your past, present, and future financials in hand, you can strategically plan for various future economic conditions. Consider establishing 1-year, 3-year, and 5-year strategic plans with clearly set goals and corresponding KPIs to measure progress. If possible, benchmark your current and planned KPIs to your competitors.
Even economists can’t accurately predict when a pullback may occur, or how deep it may be, but based on economic history it will happen. Companies that best withstand a softened economy are those who strategically plan for the downturn. Their executives have a finger on the pulse of the organization. They have a flexible cost structure that they can adapt to market conditions based on an in-depth analysis of their past, present, and future operations.
Rob Hall is the CEO and founder of RKH Consulting. Rob has 20 years’ business advisory experience, including working at a boutique hedge fund and as an investor relations specialist at a public company. He passionately reads about business successes and failures and has researched 100’s of cases studies to expand his strategic arsenal. Like a mystery novel, he analyzes the clues of a company until a successful outcome can be determined. It is within this framework that he founded RKH Business Advisory Services and created the RKH Recalibration Framework.