We are taught that if we manage properly, our company will operate at equilibrium, with supply and demand in balance. That's a laugh. You know that at any given moment, your business resources and the demand for them are almost certainly out of balance. That's why you spend so much time adjusting inventory, staff, and investments to current needs.
Ironically, it's when things are most out of balance and most need adjusting–times of rapid growth or massive decline–that many managers freeze. They laugh at scenarios of too-rapid growth by declaring that they wish they had such a problem, or they turn stoic when business goes way south, declaring "We'll get through this" and then making inadequate plans to survive.
These people fall short in part because of their failure to understand the concept of relevant range–the maximum and minimum revenue you can make in your current operation and still turn a profit. You might find you can get by with as much as 15% less revenue before key fixed costs (personnel in particular) can't be supported. Or your revenues might grow as much as 15% before your operation gets so strained it starts costing you in terms of unsound equity retention and investment strategies, as well as the lack of cost-effective capital for growth. That 15% up and down is your relevant range.
If you look at the thousands of businesses that have closed in the past few years, you'll find many of the closures were caused by failure to understand relevant range. One reason why is that while dealers might not be too bad at managing growth, they are weak at doing the reverse-engineering needed to downsize a company so its reduced expenses match reduced revenues.
This is understandable. Try visualizing driving your car in reverse with high accuracy (do not actually do this). Now, try visualizing driving fast in reverse with curves and bumps and little allowance for error (on a curvy road next to a cliff, perhaps). See my point? Yet you can find people who are trained to drive fast while in reverse: stunt drivers. If you don't believe you can learn reverse-engineering, consider seeking help to get a person on the team who can.
So how should we manage this high-speed backup when our financials go below the relevant range? First, we need to understand that time is our scarcest and most valuable resource. Second, owners and managers should stop equating massive change with failure. Managing rapid growth or massive decline does not mean failure, it simply means adjustment. This causes stress and anxiety, which will tend to cause owners and managers to take action–but they can only take action if they understand how valuable time is! They often do not know what to do if the business is outside of the relevant range. Rather, do this:
1. Determine the relevant range for your business and the odds of results falling outside the range.
2. For scenarios or actual results that are outside of the relevant range, identify courses of action, keeping in mind that time is of the essence.
3. Take care to avoid simple expense cuts. I prefer addressing areas where revenue and gross profit can be optimized.
With timely and accurate leadership and management of resources–and an understanding of the relevant range–you can address any problem with your business. After all, making adjustments is something you do every day.
Paul Bumblauskas is president of PFC Services, a management consultancy. Contact him at [email protected] or at 678.560.6725
