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Memo to Management: Cookies don't count

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The memo goes out: “Cut costs”. We all know what goes first - the flowers at reception, then the cream biscuits. Harvard University lost hundreds of millions of dollars in endowment investments as a result of the GFC yet when the heads of school met to decide on the “necessary cost reductions”, they decided to remove cookies from the student common rooms.

Sure, reviewing costs is part of the manager’s budgetary responsibility but it often has the same effect as moving the deckchairs on the Titanic. Rather than tinkering here and there, a Manager’s effort should go into assuring diversified and sustainable sources of income. Here's 8 things you need to know and do. 

                                                   

To assure sustainable income sources you need to know the drivers of your business and work on strengthening it each year: capture data, establish causality, discern patterns, assess predictive potential and constantly recalibrate your business smarts. Once you know your numbers – probably after about two budget cycles – you can focus on the financial economic drivers that impact your business. You are then able to assess each ‘great idea’ quickly. Here are current business media quotes. What are the implications?

1.  Know how you make money

  • "The majority of income is from the yield it gets on cash it holds for buyers and sellers, not from service fees". Why? You need to know what part of the business is making money so you can decide whether to continue the other parts.

2.  Count (across all income or cost categories to show span of activity

  • Last financial year, the Department of Human Services (DHS) paid out $165 billion, took 57 million phone calls and looked into 108,000 fraud line tip-offs. 25.4 million people walked into its shopfronts, 115 million used its website, while 124 million transactions went through online accounts and 61 million through mobile apps. Its outreach trucks travelled 110,000km to visit 607 towns and serve over 13,000 customers.A super fund is less concerned about a company’s balance sheet than its earnings. Why? Measure every aspect of service delivery to prove your argument.

3.  Report for the user and stakeholders

  • "A super fund is less concerned about a company’s balance sheet than its earnings". Why? A super fund is looking for quality assets that will increase in value and generate revenue over time so that it can pay your super every month.

4.  Know what metrics are telling you

  • "I’ve never seen a retailer that has a 59% Gross Profit Margin and can’t make money. That tells me there may be other issues going on that I can fix. Heaven forbid, I would love 59% gross margins".Why? that is a large  - and rare - profit margin so the money is leaking away somewhere. It shows poor management.

  • "Leading cosmetic brands, that account for more the 20% of total sales in department stores, are opening their own stores". Why? Department stores depend on cosmetics to draw customers in - what else will?

5.  Manage your portfolio's lifecycles

  • "About 46% of Australians aged 18-24 named the bank as their main financial institution but only 42% of 25-34 years olds and 30 percent of 35-49 year olds did". Why? It should that the bank loses loyalty - so it needs to address that.
  • "The company moved into three new businesses with a long lead time to income generation". Why? Where is the cash coming from to pay for the current business and the investment?

6.  Know sector and business patterns

  • "Netflix’s largest local rival, Stan, claims that 7/10 users who have taken its free first-month trial are staying on as paying subscribers". Why? this allows you to budget more accurately.
  • "When customers were able to choose a retail power company, only 3% changed provider". Why? Don't spend much on marketing!
  • "The March to June period is the least significant of Burberry’s year but Hong Kong’s high fashion has continued to drop each quarter". Why? This is a sign of structural change in the business.

7.  Monitor variables and know their metrics

  • "The actual value of X’s offer depends on future movements in the AUD/US exchange rate between now and the end of the year when the deal is expected to close, assuming that regulatory approval has been achieved. It also depends on where X’s share price is at that time".  Why? There are so many drivers beyond your control that the value declared is both unclear and high-risk.

8.  Measure behaviour

  • "Discount supermarkets hold ~1200 lines compared to the ~30,000 lines of a full-service operator. Shoppers have to go somewhere else to complete their shopping. In the UK ~91% of shoppers visit the Big Four supermarkets but also go to the discounters for a large proportion of their spend". Why? You need to know where your customers spend and estimate your 'share of wallet'.
  • Research shows that now 42% of customers never use an ATM in a typical week, compared with 20% five years ago… reflecting the change to methods of payment other than cash. Why? This shows structural change... ATMs may disappear or provide other services.
  • "The redevelopment caused customers to seek other forms of entertainment for over one year. We need to encourage them to visit again".  Why? Once customers lose a habit, it takes a lot of effort, money and time to get them back.


FOR YOUR PROJECT OR BUSINESS:

Two issues to consider: 

Assure sustainable sources of income

How often to you see a great source of income last as long as the person who drives it? Their managers KPI  should be to ensure the business grows and rejuvenates all sources of income.

Monitor the balance of core: non-core revenue and profit

Some businesses are constrained by key drivers. An example is the Sydney Opera House where it is difficult or a hirer to make a profit because of the small theatre size. The Australian Opera annual report 2013-14 unveils that nearly 50% of box office now comes from musicals (a different audience paying a higher margin). 


Two questions to ask:

1.  What metric is your revenue 'orange warning light'?

2.  Are you making money from the business you are in? Can you change the business model without compromising your product or service delivery?


I often wonder whether the focus on cost cutting, rather than sustainable income generation, could kill the business.

This blog is for education purposes only.

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