BD23

BD23 BLOG

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BUYING WELL – Part one

To paraphrase Michael Jackson – start by looking at the man/woman in the mirror.

Before approaching a supplier, be they new or existing, with the intention of reducing your input costs take a good look at your own organisation. Do this by trying to see yourself through your suppliers’ eyes.

Start by describing what attributes your ideal client would have. Obvious traits are things like low credit risk and paying within terms. Consider your existing client base and make a list. Also consider what makes a bad client. For example are their communications clear and concise or are they a nightmare needing 20 phone calls where 1 would have done. Now you have a list of desirable attributes you need to measure yourself against them.

Are you a desirable client?

If not, consider what you can do about it. You may need to change your ways or you may just need to be a bit more creative. For example if you are not paying your bills on time, why are you not paying them on time. Is it cashflow?, is it slow administration? What can you do to change. Asking for extended terms may help as it is better to pay promptly on extended terms than late on shorter terms.

Being as good a client as you can will enable you to buy as well as you can.

To be continued …

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COST CONTROL - Why this is important

In it's simplest form a business has inputs and it has outputs. The difference in value of these determines whether the business is making a loss or a profit.

If the business is making a loss then the chances are that simply increasing the outputs will equal a greater loss until such a point that economies of scale might close the gap. In this situation it is not unusual for companies to want to turn things around and reducing costs becomes the major focus until such a point that they are back in the black - "job done!".

Profit making companies may well be in that position because they have got their costs well under control and maintain a focus on them. It could also be the case that they are profitable despite not maintaining a focus on costs. Most business owners will be able to tell you to the fraction of a percentage point how their sales have changed from month to month but I doubt very much they could do the same for costs. This is why re-visiting this area of your business from time to time can make a huge difference to your bottom line.

Are you missing a trick by not having your costs completely under control?

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COST REDUCTION - The Maths

No one is going to come in and halve your business costs but small gains here equal a significant impact on your bottom line.

Consider this:

Your business turns over £1m
Your nett margin is £100k i.e. 10%
Your costs therefore are £900k i.e. 90%

If we want to increase our bottom line figure of £100k to £150k we can achieve this in two ways:

Increase sales - If we increase our sales to £1.5m and keep the same profit margin, we have achieved our target
In reality our costs should not increase in proportion with the sales as some fixed costs will remain the same or only slightly more. Let's assume our additional sales are achievable at half the costs of the original sales. We therefore need to increase our sales by only £250k or 25% to see the additional £50k on the bottom line.

Reduce Costs In order to have the same effect on the bottom line i.e. £50k we need to reduce our costs by £50k which as a percentage of our £900k costs is 5.5%

We then only need to consider which is more achievable an increase in sales of 25% or a reduction in costs of 5.5%?