Good Economic News is Always Welcome!
Max
Williams, Principal Consultant
The economic outlook appears to be
brightening with recent news of increasing retail sales.
While good economic news is always welcome, this latest data suggests
that the recession is almost over, and the recovery has begun. With
unemployment steadily on the rise, this cannot be the case - and a
single focus on retail spending is still only part of the story. Retail
spending, is of course, responding to the economic stimulus package now
pushing billions of dollars into retail buyers hands. There may be some
debate about whether or not the stimulus is as effective as it should
be, but there is little doubt that quite a lot of this stimulus cash is
finding its way into retail tills.
If this is a good
new/bad news story, how should the prudent business person respond?
On one hand, many will want to wait and see. On the other, some
will want to ?seize the day' and ?make hay while the sun shines'! The
risk in the latter case is going to far ahead of the market, and
investing in people and other resources that the market simply won't
sustain. In the former case, the very real risk is seen in
letting competitors steal a march over you on the recovery - leaving
you to play catch-up for many years to come.
At this
stage, the picture is still very unclear. The result, as they say, is
?too close to call'. So what to do?
In this edition we
examine a prudent way to budget to get the best of both worlds -
keeping yourself in a secure position in case the downturn worsens -
yet positioning yourself to maximise your advantages from the present
optimism in an otherwise very shaky market!
R ecent market data
shows that retail sales have been strong in April and May. This is
fantastic news - and the thought of pulling out of the recession before
it has hit too hard is a great relief for us all. The big concern must
now be that we do not over reach. With all those business
development ideas put on hold just a few months ago, it is tempting to
go full steam ahead right now. Be sure to budget properly for your
recovery - and do it now!
With the end of the
financial year approaching, it's common to think in terms of
minimising tax before the year actually does end. A more constructive
approach might be to think in terms of making the best possible start
to the new year, and planning accordingly.
That is not
easy - when the financial news is so confusing! But here is a good way
to get your new year off to a great start.
More
expenses spell danger!
Right now, some of the headlines suggest
that the worst is over, and that 'greenshoots' translates into 'green
lights'. If that is so, we can go ahead and now do all the things we
have been holding back. Generally, that means new staff, new signage,
new marketing material, and extending the
office/shop/warehouse/factory/car park.
In each case,
doing these things means taking a hit on the bottom line as we increase
our expense levels. Maintaining our Return on Sales can be achieved
only by a very significant increase in the level of our sales - and
that increase also needs to be at full margin too.
That might happen, and if it does we will be in a very good position.
But it is a gamble, and what will happen if the gamble does not pay off?
This leads us to the first principle in making up the budget for
the 2009-2010 year:
- Keep expenses in check, and
-
- Keep them less than last
year if humanly possible.
Extra sales come at
lower margins
Extra sales will be at lower margins, if the heat
goes out of retail demand. Even if you are a manufacturer, you can't
expect retailers and wholesalers to bear the whole brunt of margin
reduction.
On the other hand, the purpose of your
planning is to increase your market share - and that means an increase
in sales. That is one of the ways your margin will be reduced - as you
work hard to take customers from your competitors, and they retaliate
to keep them.
The
budgeting solution is simple. Plan for sales at an average
margin that takes account of those new sales coming in at 5 points
lower at the gross margin line. That would be realistic!
Maintaining your marketing spend at the same rate to sales as you had
last year, is a sound way to build a plan to develop the market,
while keeping expenses in check. It will almost certainly mean an
increase in marketing expenditure - and a reduction in some other areas.
Increased
productivity is a basic assumption in all of these steps. You
will be keeping your expenses at or below last year - so there will be
less of everything to do what is needed - except marketing expenses.
But keeping the marketing expenses at the same rate to sales (and
therefore increasing in dollar value) is not going to be enough to do
what has to be done in the same old way. Even your marketing
productivity will need to increase.
So, let's
summarize!
- Work with your staff and suppliers
to reduce your costs - while at the same time doing more. You would
have done that anyway, but now to keep your self safe in the face of
uncertainty, the task is even more important.
-
- Work with all
your marketing professionals to et more for less - for instance
by using expert buyers or taking longer term contracts. Then
demand the very best inputs from them. What they did last year is not
good enough now!
-
- Plan to take
sales from competitors even if the prices are lower than you
would normally choose. This is the time to get ahead of them while they
are confused by the economic outlook news, and,
-
- Hold expenses at
last year's dollar levels - except for advertising and other
marketing expenses, which will grow in relation to your increased sales
plan.
And one more thing.
Be prepared to change tack if the outlook
changes!
If you begin your budget process now, your
recovery from this recession will start immediately! You will be
stronger, and grow a bigger market share than those who just 'wait and
see'.
If you'd like to find out more about budgeting for
your recovery right now, talk
to us, or ask us a question here! Remember, there's no charge or
obligation.
This same offer applies in New Zealand. Click
Here!
McNicol
Williams Management & Marketing Services is a Small Business
Advisor listed with the Small Business Victoria, and has presented The
Red Zebra program under its auspices. This listing requires
that the first hour's consultation is always free. So when we say
"No charge or obligation", we mean it!
