“Our Cost Improvement Opportunities Can Only Be Found Within Our Operations” (Myth 2)
It is true that there are a wide number of cost improvement opportunities that can be found within your operations, which in this context refers to the engine room of the business, but if you believe this is the only place to look, then you may be missing opportunities in all other areas of your business that would enable you to generate savings.
Recent research shows that over half of all managers surveyed are unable to distinguish profit from cash flow, and nearly two-thirds think that discounts have no impact on gross margin. This lack of basic understanding about the financial workings of a business means that many businesses are suffering from unnecessary profit loss, and, statistically, yours could be one of them.
It is important for your employees to be highly focussed on their respective roles. If this is their only focus, though, they may not see the effect of what they are doing on the commercial viability of the business as a whole.
Can you be confident that your people understand the financial fundamentals of your business? If not, they are likely to be unclear about what exactly impacts on your Profit & Loss statements and may not even know what all of your operational costs are. Without this understanding, they miss the bigger picture, and your business suffers.
In essence, this is what you need to know: if you want to benefit from all possible cost improvement opportunities, you need to educate your key employees with basic business and financial acumen.
It’s like playing a game such as Zodiak®—The Game of Business Finance And Strategy. Even if you know the rules, you may not know the fundamentals. And if you don’t know the fundamentals, how can you win the game?
To start with, what exactly are the fundamentals? Essentially, they are all the things that have an impact on your objective. Fundamentals include strategic management, financial management and accounting, people and stakeholder management, selling and marketing management, and operations management.
Playing With The Fundamentals
Going back to the idea of playing a game, let’s use another example and I’m going to use a classic family favourite, Monopoly, to show you how it works. In Monopoly, your objective as a player is to own property and make money. Just as your business has fundamentals, so does Monopoly.
The fundamentals of Monopoly are things like money management, how much you have spent, what your assets are (how many properties, houses, and hotels you own) and how much you are earning. These are the financials.
As well as the financials, you have things like dealing with the bank, dealing with other players, dealing with chance and community chest (government, society) and negotiations (buying and selling). These all fall under the umbrella of stakeholder management.
Your strategy is the way in which you achieve your objectives. So, in Monopoly, do you buy every single property as soon as you land on it, or do you wait until more expensive properties that other players’ land on go to auction?
The first strategy may help you build a good portfolio and prevent other players from achieving the same. The second strategy may enable you to buy high-end properties for less money. Then, once you have properties, do you buy one house on each of the properties you own, or do you focus on getting a hotel on your most expensive property?
Strategy requires knowledge of the fundamentals. If you know that it is to your benefit to wait for properties to go to auction, then you can adopt that strategy. If you know that buying every single property you land on means that you will have acquired a lot of assets and may have the chance of earning a small rental income in the short term, then that may be your best bet. However, you will no longer have much cash, which may mean you can no longer operate and continue playing.
The same basic idea can be applied to your business. In order to achieve a business objective, you need a solid strategy, and to have the right strategy, you need to have knowledge of the fundamentals.
When you break it right down, business is simple. It revolves around three things.
1. Do you have good cash flow?
2. Can you make a good profit?
3. Do you have a strategy to grow?