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Fiscal fitness: Know your costs

May 15, 2001

4 Min Read
Fiscal fitness: Know your costs

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Editor's note: At the annual convention of the American Mold Builders Assn. held earlier this year, Steve LeFever of Business Resource Services (Seattle, WA) spoke to members about the need to be fiscally fit and, more importantly, the need to better track costs. What he had to say applies not only to moldmakers, but also to molders.
 

Most moldmakers work in their business as opposed to working on their business, says Steve LeFever. This can lead many companies to be fiscally unfit, he says. Cash flow is critical to a company's health. Profits and cash can be compared to food and water. Which one can you do without the longest? "You can go a long time without profits [food]," LeFever explains, "but without cash [water] you're done for quickly." 

With business in the moldmaking industry down, LeFever says it's important to realize that a company can't save itself out of a recession. "You have to spend yourself out of a recession," he says. "There are a lot of things you can't control, but you can control your company." A recession, according to LeFever, can be a huge disaster, but it can also be a huge opportunity. The key is understanding the costs involved in doing business. 

Know Your Costs 
Every business has a cost structure, says LeFever, and if you don't know your cost structure, you'll likely be in trouble. 

There are many formulas to keep in mind when figuring costs. For instance, sales minus the cost of goods sold equals your gross profit. But as sales go up, so do costs. It is also important to remember that there are two kinds of costs: fixed and variable. "Sales cause variable costs," LeFever explains. "Nonsales functions are fixed costs. It's critical to know your variable cost percentage. Sales minus variable costs equals the contribution margin (CM). And the contribution margin minus fixed costs equals profit. 

"Can you be successful without knowing your costs?" LeFever asks. "Yes, but it's luck. And when does your luck run out? When your competition knows its costs or when the economy changes to a recessionary one." 

Unfortunately, growth is not always a good thing. In fact, growth can break you, notes LeFever. "Most people say, 'business is good,' meaning sales are going up," LeFever explains, "yet their profits are flat or decreasing. Sales don't measure growth. Profit measures growth." 

During tough times, there is often pressure to cut prices to get business. The small guys, those who are barely hanging on, are the first to cut prices. And though customers migrate to the lower-priced shops, it's not long before the larger, stronger companies cut their prices to win back customers. "How long can the big, strong companies underprice their services?" LeFever asks. "Longer than you can!" 

Sales growth also causes a need for more assets, which often requires financing. LeFever points out that it's much easier to get financing when you go to your banker with a complete financial analysis of your company. "People who have the greatest access to funding are those who know their cost structure," he says. 

"Manage and measure the numbers on your balance sheet," LeFever says. "That's the cash flow." 

Open to Change 
If you can't make a profit doing what you're doing, then "you need to rethink how to do business," he says. "If you can't put more profit in the cup, you have to get out. This is a time you can choose to be proactive." 

LeFever says the key word is "change." If you can't change or don't feel like changing, then "get out and sell," he advises. "Don't sit and wait until things happen to you. Don't wait until there are no more options." 

He notes that in today's economic climate there will be more mergers and acquisitions. "It's feeding time at the shark tank for the acquisition people," LeFever says. That's because when times get tough the weak companies tend to fall by the wayside and bigger, stronger players pick up these companies for a song. 

"Big companies grow an average of 10 percent annually during the good times," explains LeFever. "Their growth rate jumps to 90 percent during the bad times because of acquisition." 

Contact information
Business Resource Services
Seattle, WA
Steve LeFever
Phone: (206) 284-5102
Web: www.brs-seattle.com

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