It all starts with the vision and for the vision to succeed we have to plan.  The diagram above is where I love to begin the planning – the Balanced Scorecard (BSC) approach.  As a matter of fact, BSC is used quite frequently and to great success.

But the reality is, we probably won’t need it, at least up front.  Let’s face it, you are not hitting targets now so creating highly integrated scorecards for business units and departments isn’t going to help.  It will come, but only after we staunch the bleeding.

Staunch the Bleeding

The first practical planning step is to perform triage.  Chances are your business is like a diabetic cancer patient who sliced his palm with a butcher’s knife.  All three are capable of killing you – the question is which one will kill you quickest, and then deal with that first.  We have to do something quickly to stop the bleeding, to keep the mistakes from continually piling up, so that we can start the other changes necessary to help you fully heal and prosper.

So how do we go about staunching the bleeding?  A tourniquet works well in all instances but it could be excessive.  Nevertheless, it is an apt metaphor for addressing a business problem.

If you are losing money, throwing more money at it doesn’t help.  Let’s say that you have a product line which costs $8,500 to manufacture.  You are currently spending $100,000 in overhead monthly to support that product line.  If your current price is $10,000 and you are selling 20 units a month, we have identified a bleeder.  Selling is contributing only $30,000 towards your overhead, meaning that your other business lines are subsidizing this activity for $70,000.  Or, what is more likely is that you are using $50,000 of current net operating income from your other products and eating into your equity the other $20,000. Every month.

The sales person in you says that we simply have to sell another 47 units to reach breakeven.  That’s right, you have to double current sales volume, and without increasing your overhead!  But your current $100K of overhead including marketing, advertising and sales costs – so while another 47 units is a great goal, it isn’t going to work with the current overhead.  And we are not going to spend another dime until the problem is solved.

The reality is, we have to

  • eliminate your wonderful new product line; or
  • Raise its price; and/or
  • cut costs

Raising prices is actually easier than it sounds, although it probably won’t be enough unless you go big.  Imagine though, what if you could increase the sales price to $20,000 and we could reduce the overhead to $60,000?  And what if the price increase meant you only sold 8 units instead of 20?

First thing to understand is that your product line is now generating $11,500 of gross profit to your company when you increase the price.  Yes you are only selling 8, but the gross profit coming in is now $92,000.  Which generates a $30K net operating income after direct expenses!

The overhead could be cut because we may not need to do as much marketing and advertising, we don’t need to pay salaried sales professionals (or at least as many), etc.  In short, the mix of price increase and overhead cutting turned your $70K money loser into a $30K winner.

Now, I hear your next question, “What if sales dropped to zero?” Then we are at the eliminate your wonder new product line.  At least for now, until we can figure out how to bring it back and not kill you by draining you of every dollar you make.

Planning is important but addressing the problem, the cash leaving your business, is even more important.  Making dramatic changes gives you breathing room to do more effective planning.  And the short-term goal is to get breathing room.