Red Zebra Business Centre -Management Memos
June, 2009. Making Measurably More For Your Business Since 1985!

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!

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Budget now for recovery!


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!