The end of the financial year is upon us and companies are turning their attention to priorities and targets for next year.
With the pandemic still causing staffing and supply interruptions, the RBA expecting inflation to peak “at around 7 per cent in the December quarter” and unemployment at a 14-year low, there are no shortage of challenges…
As the Treasurer recently observed, “we can’t just pretend away these big challenges that we confront in the next six or 12 months”. How is your company managing this… Are you confronting these head on? Or are you sweeping them under the carpet?
As you embark on your strategic planning for FY23, consider these five questions to confront the current conditions head-on and position the company to come out the other side stronger.
Are we growing with fewer, more talented people?
Too many companies ‘throw people at the problem’ only to discover that the problems get worse. Unnecessarily introducing people leads to more complexity, less speed and more room for execution sloppiness. Adding people should be considered a final step after you’ve explored other ways to operate efficiently.
If you do hire, consider whether you’d rather recruit one A-player and compensate them very well, or hire 3 C-Players and pay them an average wage?
Yes, the impact of a great hire can be that much more than an average one! And in a tight labour market, how many gems do you want to be searching for?
And considering that A-Players want to work with other A-Players, you’re going to have some frustrated and underperforming talent if you don’t put the right people around them.
Now is the perfect time to be thinking about compensation and whether you can consolidate around your very best talent. A great indicator to look at your efficiency is revenue per employee. Research conducted in 2019 found there were 10 ASX listed companies making more than $3 million per employee (with a median headcount of 496). Those companies likely aren’t quibbling about a 10% or 20% higher salary to attract top talent when the business model is that strong.
Overcoming the talent shortage can be helped by knowing the right ‘fishing hole’ for your company. Can you identify a consistent source of great talent that other companies aren’t focusing on? An undifferentiated business strategy is suboptimal and so is an undifferentiated approach to hiring.
Consider the case of City Bin Co in Ireland. They identified that aspiring athletes were a great fit for their garbage collection roles (great work ethic, the lure of ‘getting paid to work out’). So their fishing hole became the boxing gyms and sporting facilities that were full of their ideal candidates.
Or a mid-market carpet retailer that struggled to find sales assistants. They identified that sales assistants in footwear had many of the same attributes to succeed in selling carpet, but were getting paid 20% less in their current role. Of course, they were delighted to make the move (and not have to deal with feet all day!).
Are we laser focused on our core customers?
Your core customers tend to be the most profitable, have the shortest sales cycle and are the easiest to please. And it’s when we move away from our core customers that growth starts to get hard – we introduce complexity in marketing, sales and operations trying to cater for too many variations.
The complexity slows us down. Margins get squeezed. Profit suffers.
Examine a waterfall graph displaying your profitability by customer segment. This is a scary exercise for many companies, realising the vast resources being wasted on customers that simply aren’t profitable. Sometimes I hear responses like “but it’s a strategic decision” (e.g. they’re unprofitable now but that’s going to change in the future). Ok, but is your strategy to lose?
The other dynamic with your core customers is that they’re more tolerant to a price rise. They understand the value of what you do and aren’t afraid to pay for it. Which leads into the next question…
Have we got our pricing right?
It’s vital that companies revisit pricing in the current conditions. Take a typical scenario right now: Your suppliers are increasing their prices. You’re paying more to bring new talent onboard in a tight labour market.
You’ve got these factors squeezing your margins. Then you throw in inflation. That widget that you sold for $20 a year ago effectively has a price tag of $19 now.
If your prices haven’t gone up, then you’re most likely going backwards. It’s never a fun thing to tell customers, but the reality is that customers are expecting it and more likely to tolerate it in the current environment.
Consider how Go-To Skincare broke this news to its followers on Instagram recently:
“… these changes will allow us to maintain the products you know and love, with the quality you expect and we demand. We understand the effect even small price increases have on your day-to-day life, especially when it all happens at once, from every angle. We value you and your support.”
Combined with this empathetic messaging, they simultaneously reduced prices for some of their secondary products, offsetting the bad news. A solid example of the power of good communications.
Are we putting our cash to work?
Even if you’re successfully generating cash you want to be mindful of where it’s going. The old adage that ‘cash is king’ takes a more nuanced meaning in an environment of high inflation.
Yes, cash is vital as it serves as fuel to pursue opportunities (e.g. reinvest in growth, make an acquisition, lure top talent) and provides reserves to sustain the company through tough times. But holding reserves of cash is problematic when its buying 5% less than it did last year.
So it pays to be moving your cash into liquid assets that benefit from price rises. At minimum, you might keep pace with inflation and can shift gears quickly. For example, some businesses right now are finding there’s benefit in transitioning some of their cash to inventory. It can ensure their ability to keep producing, lock in prices earlier and offset the impact of rises.
Are we using uncertainty to our advantage?
Many leaders are challenged by the uncertainty of the current environment – highly variable freight costs, staffing interruptions due to Covid-19 or seasonal flu and rapidly shifting prices. There’s no doubt that’s it difficult and easy to be overwhelmed. Getting in front of it can mean prioritising and picking off the risks one-on-one that need to be mitigated.
The needs for your customers or suppliers can shift in times of uncertainty. This presents an opportunity.
For example, your suppliers may place a greater emphasis on cash flow right now rather than maximising their profit from each order. So they may be prepared to take cash on delivery rather than 30-day terms in order to prioritise your supply.
Or with your own customers, are you being firmer about time limits on the acceptance of quotes? This will help to reduce the risk to you and, at the same time, can be expressed as a positive to customers (e.g. if you make a decision now, it will cost you less!).
With your workforce, what can you do to prepare others to take on someone’s role if they become ill or unavailable? Do you have some basic redundancy in place to ensure business continuity?
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While it’s a time of uncertainty and change, it’s also a time of opportunity. Customers are switching to suppliers where they feel more valued. Top talent is switching to companies with a better outlook. And promising businesses are being acquired at good prices. Consider these questions to get on top of the uncertainty and position your company for a prosperous FY23.
