Doug:
From Rea & Associates' remote studio in Newark, Ohio, this is unsuitable, a management financial services podcast for entrepreneurs, tenured business leaders, and others. We're ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser on this weekly podcast thought leaders and business professionals break down complicated and mundane topics to give you the tips and insight you actually need to grow as a leader and help your organization grow and thrive.
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This is not the first time we've reflected on how the COVID-19 pandemic has changed the way we do business and it won't be the last, but today we're going to talk about the crisis from a cash flow and cost optimization perspective. Jim Lichtenberg, strategic partner with expense reduction consulting company Schooley Mitchell is here to help us break down COVID into dollars and cents and how companies can find some financial breathing room, despite the new COVID line item on their balance sheets. Welcome to unsuitable, Jim.
Jim:
Well, thanks, Doug. I appreciate the invite and being here today.
Doug:
Yeah, great to have you on, always insightful. Although the circumstances aren't ideal for any of us, we're making do in today's world. I guess that's a great segue to the theme for today. Give us some background, if you could, about cost optimization and what you can do in today's world that we're faced with to be more efficient in that regard.
Jim:
Just like you said, we're all adapting today. So when you think about it, I reflect back to March 1st. What were a lot of us doing as businesses and business owners back then? Much different landscape that we're in today when you look back to March 1st. So cost optimization should always be like on your big board. If you think ... I don't know how many have seen the major league baseball draft last night, but I was paying attention to it. And who's always the top pick, right? Who's always the top five and cost optimization should always be in the top five. I think right now what you're seeing is, the first one is people, right? You got to take care of people. You got to take care of your clients, everybody has to feel comfortable today. People want to work for you and they want to do business with you.
But then instead of maybe at five or six, optimizing costs is leaping up to that number two spot, because the restrictions that are in today, you really got to look at being efficient. How can you do things better today than you did just a few months ago? And when you talk cost optimization, you've got to be strategic about it. You got to look at it from a perspective of what are the big items to look at first?
Today there are new costs, right? I mean there are things that businesses have to do to ensure social distancing, to ensure personal protective equipment. So with those additional costs, you've got to go, "Okay, how can we be strategic about that? How can we optimize those best?" Go to the sources you trust. Go to even some independent experts that might deal in that day in and day out before anything ever happened, to get the best pricing that you can. Maybe buy more than you ... you know, don't buy it for a month. You know you're going to need it for six months. You know you need it for 12 months. Buy those larger quantities, be smart about it.
Then look at those other items. Other items meaning your day to day operations. Depending on your business, that could be what's your mortgage? What's your commercial insurance? It could be how you transact business so if you take credit cards. It could be merchant services. It's how you communicate, like using telecom. There's a variety of cost items you can look at. And when you get into the details of it, it's not just today. Okay? Today's June 11th. You can save 20% today. Hey, that's great. But what's going to happen to that cost three months from now, six months from now, a year from now? And it's easy to forget. I mean ...
Doug:
No, it's great. I think the hard part right now is predicting the future. As you said back March 1st, none of us would have thought we'd be sitting where we are today. But I think what this does is it presents an opportunity for all business owners out there to really rethink their model, right? And so it's cost, it's how they deliver, it's what they deliver and what the demand for what they deliver will be, right?
So you can in some ways ... I hate to use this word, but it really is a chance to take a step back and reset and rethink what you do from top to bottom. And certainly, cost optimization, things that may have looked efficient three months ago may not look so efficient right now. So let's rethink all that.
Jim:
Yeah. You know that, Doug. You do have to take a step back. You have to use some analysis tools that maybe you weren't using before. You got to look at, to your point, what was happening on March 1st? Your business could have been thriving. It could have been very good. And today it could look very different. So using tools like a rolling forecast or a SWOT analysis, which are strengths, weaknesses, opportunities, threats, that should be done now. You get to look at that because that's probably changed a lot from what it was just a few months ago. So that helps you identify what should we look at optimizing? What are those big cost items? What are ones that are directly related to operating sales functions?
When you optimize those costs, that directly relates to cash flow so improving your cash flow makes your business stronger. It gets you in the right position so you can continue to move forward. And you should always continue to look ahead, okay this is how I managed today, but how am I going to manage three months from now? What are things going to look like maybe October 1st or a year from today? Putting these things in place just allows you to gain a lot of efficiencies and allows you to be able to scale. You can be more efficient, means you're stronger, you can scale your business appropriately. One item that we were on point before was, saving 20% today is great. What's it going to look like a year from now?
That's really critical because you could do a good job today, but just like we talked about, you're looking at your business, okay, what's going to happen in six months? What's going to happen in 12 months? You can lose track of those items. And it's easy to do. It's just the way of doing business when you solve one problem, you move on to the other. And there's a lot of items today that needs attention, that needs solving.
The key point for optimizing costs that I think gets missed a lot is a process where you actually audit. What I mean by that is, okay, you saved 20% today. Hey, that's great. But we should be looking at this every month or at least at a minimum every quarter, where are we at? Are we still saving that amount of money? Did our business grow? The cost category went up because sales went up. [crosstalk 00:08:47] more volume, maybe we can get better pricing. So you go revisit that opportunity to save more.
I think that's the thing that gets missed a lot is it's just a point in time. Hey, we saved some money. Great. Let's move on. And it's taking that extra step going, "No, we've got to ensure we have ..." if it's an internal resource if it's an external expert, some kind of process built-in that's making sure that you stay on top of that savings because if that saving goes down, if it changes on you, goes from 20% to 10%, well, you just decreased cash flow. You're not optimized like you thought you were.
Doug:
So here's one of the things that always kind of frustrates me a little bit when I hear gain efficiency and cost optimization. I think people always think, oh, we're cutting costs, we're going to look at everything and cut costs. And I try to remind folks, and maybe you can expound on this a little bit, that doesn't mean you're always cutting costs. You could be investing on the other side to gain efficiency or make things run smoother or create additional opportunities, right? I mean, that's part of the cost-benefit analysis, right?
Jim:
Oh, absolutely. You could optimize what you have and it could be a change in technology. So there is an investment, but the change in technology could create efficiencies like we're doing today. A lot of companies had to learn that. They had to learn, "Hey, how do we work from home now?" So a lot of it can be an investment which could equate to savings, but it could just equate to efficiencies. People who are more able to do what they're supposed to do, they perform better. It's more flexible. Like now, we can do things remotely much more easily today than we did three months ago because we had to learn, we had to adapt.
And to your point, it's not just cost-cutting. It's about, okay, if we do save money in this area, cost A, hey that's great. But now let's take those savings and then move it to sales opportunity B because we can expand there. Now you're really just moving money from one bucket to another, to invest in your business to either provide a new service or provide additional opportunities for customers and grow sales. So you're absolutely correct. Don't think you're cutting costs to cut costs. You should be cutting costs to gain efficiencies, but you should also look at ways to be more efficient that translate into investing in new opportunities for your business.
Doug:
Absolutely. I think now is, as we said before, the perfect time to maybe take that step back and really examine all of these things. The other key point, and I know you're a big believer in this, we can talk about analyzing this stuff and looking at it, but if you don't have good information in terms of the inputs to be able to evaluate this stuff, you're really screwed before you ever start. So you've got to have good information to be able to plug into your cash forecast and cash flow. What do you try to do when you're working with people to get them set up to do a rolling cash flow? I'm a big believer in that as well and I'm curious to hear how you get people to buy into doing that.
Jim:
Well, you nailed it on the head, Doug. I mean, you have to have good data. If you don't know the data or where it's coming from, or if it's real, you can't use your gut in those situations, you've got to look at what the numbers are telling you. You got to look at your books, you got to look at your sales, your costs. Look at your income statements and always refer to your budget. Your budget should be rolling as well. It shouldn't be a fixed thing that you did in January and here we are in June. A lot of things changed since January, that should be updating itself. It needs to be updating itself on a monthly basis. That's how you can stay agile. That's how you can direct your business is you need to gain efficiencies and opportunities.
To your point of doing the first step is, okay, let's get the information. And a lot of times it's, okay, do you have that internal person that can get you the information? That's step one. And if it's a smaller business, they may need help with that because they are so deep into managing the day to day operations. Let's take a step back and let's find that information. Let's see what you do have and then it's about creating the processes around that so you're getting those details regularly, and that you're looking at them.
And you want to be realistic when you look at a cash flow analysis. What do you need to maintain your business? There's a point to maintain it. There's a point to where you would like to be at, you know, to be where you may be expanding, but you have to have that opportunity to really look at the numbers, to see what's there.
It's about, hey, let's have fun with your business. Your business wants to grow. You just don't want to maintain, you don't want to stay the same and stay stagnate. You want to grow. Maybe it's opening up another location. Maybe it's another service or product you want to add to your business. Look at it from that format, because that's usually what energizes business owners. It's like, okay, what can we do to grow? What can we do to expand? Getting that data is step one and then step two is putting it into that forecast model. Then step three is, okay, let's put the things around it, if optimizing costs, if it's creating efficiencies and processes if it's creating a new sales channel, whatever those things are, but it's based around data and it's based around where you want to go.
Doug:
And that's the key too. I know we preach this over and over to our clients. A budget or a rolling cash flow should be a living, breathing document. It's not stagnant, as you said, it's not, okay, we're going to do this at the start of our year and just put it on the shelf until the end of the year and compare how we did. I mean, that doesn't do anybody any good. So you've got to continue to evaluate as you go along.
But one of the other things I wanted to ask you about Jim, we hear a lot about this in today's world, pivot, right? Pivot. I'm going to pivot my business or all that. Sometimes I get tired of some of these buzzwords, but what do you think of when you think about, okay, let's think about evaluating our business and where we're at, and are we doing the things that we should be doing? What does that mean to you?
Jim:
So when you talk about ... and I agree, I mean, the pivot's such a great term, but it is a buzzword today and it really just means what's the next opportunity? Again, what were we doing March 1st may not be the right way to do business today, or might not be the best way to go about business today. When you look at those things, you need to know what was working on March 1st. So if you don't really know, the business was just doing good, you need to take that, okay, let's dig a little bit deeper. Why was it working on March 1st before things changed? And then let's look at the environment today. One aspect could be who are your clients today, compared to when it a few months ago?
It could look different and there's a lot of reasons for that. Some people are wanting to go out more. Some people are wanting to go out less. Now, some people are going to e-commerce, or curbside pickup, if it's that type of business. So when you look at where you were successful, okay, great. Determine what those things are, what we really did well. Now, how can you translate some of those things if it's not built for today to target to be successful today? How can you get in that area that's right? So a little bit of ... you know, that's why I mentioned that SWOT analysis because that's telling yourself what are you good at? What were you doing right? But then today, okay what's some of the threats? What are some of the weaknesses we have? Try to see how you can overcome those.
And then I always see the opportunity part is huge. That's where the pivot comes in too. If you understand what the opportunities are, and just for example because it's what a lot of people can relate to, e-commerce. If you weren't doing it before, or you weren't focusing on it, you should be doing that today. That's the type of business, let's just say, if it's especially retail. Family-owned business. What you should be really investing in an opportunity to at least reach clients that might be shopping from home, but they're just going to other areas instead of going to your shop like they did three months ago.
So it's looking at those opportunities of where you can maximize to get in front of not only your current clients that you had three months ago but also new ones. Because if you go into a new area where you weren't getting that audience's attention before, you may have an opportunity to grow your business and gain their intention today. But this all [inaudible 00:18:49] back to what were you good on March 1st? And what can you be good at today, moving forward and the new opportunities that are available?
Doug:
I think the other thing, you touched on it briefly a bit ago, is when you do that kind of SWOT analysis, it's also important to look at your personal passion and what you want in your business and what you want your business to be, and what you want to do.
It's interesting because we were talking with a client, a business owner this morning, and they're thinking about selling one of their divisions because this time has allowed them to take that step back and look at it and say, "You know what? While this division is good for my business in terms of the financial return, I simply don't enjoy it. I'd rather devote my time and energy over here, this other side of the business. And that's my family's passion." I think all too often we tend to take the personal side out of things. And I think that's important too. Do you find that when you're consulting with business owners that they do that?
Jim:
Yeah. I mean, that's what I enjoy the most when working with business owners is that passion that you see and that's what they should be focused on. Normally the things that can frustrate them and cause more challenges than they normally encounter are the things that they don't have the passion for. That they don't necessarily like to do. Some of that can be, who likes to do office work, right? I mean, [inaudible 00:20:35] some people love it, which is great. A lot of business owners or entrepreneurs might not enjoy that. And I just mentioned that to relate it to what you just said, so it could be, hey, you expanded in an area but is it really your passion?
A, why did you do it? Okay. There was an opportunity there. But then if it's something that you can't get excited about and continue to grow, that's a great self-analysis, which I think a lot of businesses should be doing is what's our core focus? We shouldn't be in five different things if we're really good at two or three. Let's focus on the two or three we're really good at and that we're passionate about and let's just continue to get better at that because you're already good at it.
It's much harder for people in businesses to try to do really well in something that they're not passionate about or that ... I don't want to say they're not good in, but it's not their core. Not their core focus. When I talk to business owners, many times you know what they're passionate about. You know what they want to do and where they want to go.
And that gets me excited because if I can help them with that piece, I always say, it's always like if they would write a book and it's a multi-generation family-owned business. I don't have to even be a chapter. If I can just be a page in the book that allowed them to get to their next chapter, that's awesome. That's what drives me. That's what my passion is. Because if I help a local business, it's helping not only them, but it's helping the community and everybody around it.
Doug:
I think that's sage advice, Jim, and I think that's a phenomenal way to take a look at not only what we each individually do, but obviously for business owners to reflect and focus on what's important, so I really appreciate that. And if you want more business tips and insight, or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast and while you're there, sign up for exclusive content and show notes.
Thanks for listening to this week's show. Be sure to subscribe to unsuitable on Apple or Google Podcasts or wherever you're listening to us right now, including YouTube. I'm Doug Houser, join us next week for another unsuitable interview from an industry professional.
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