If you cut your cloth according to your situation, your business should be able to thrive in almost any situation.
In a motoring sense - Ford would be forced to cut its cloth according to the demands
of the market.
Or the Government may have to cut its cloth and eliminate programmes that were not being used.
These are organisations must adapt to the ebb and flow of the market – one is public sector the other private. Both will have to cut their cloth according the environment they find themselves in.
Let’s take a look at an example. A large part of this ability to cut your cloth comes down to overheads. Generally, businesses have some fixed costs and some variable costs. The fixed costs are things like rent to a landlord or gym you work at. Variable costs could be power, consumables things that generally increase the busier you get. The trick in cutting your cloth is to have your fixed costs as low as possible and your variable costs being able to drop to a very low base. Add these two together and ideally, they are lower than or at very least equal to your turnover on your worst week of the year.
Sales – (Fixed + variable costs) = gross profit
Example: Healthy trading environment
So, in an ideal world this may look like this:
$10,000 – ($5,000 + $2,500) = $2,500 You make money – phew!
Example: Poor trading environment no “cutting of cloth”
However, in a downturn like COVID this may look something like this:
$7,500 – ($5,000 + 2,500) = $0 you break even – you are still in business – how long can this go on?
However, if you were able to scale back your variable costs because you have less turnover you’ll be cutting your cloth to fit the change in circumstances. This may then look a healthier picture.
Example: Poor trading environment with “cloth cut”
$7,500 – ($5,000 + $1,200) = $1,300 you make money again
Often the fixed costs are just that – they ain’t moving. The skill is to get as many of your fixed costs into the variable costs category in your business so the cloth cutting process is an integral part of your business rather than something you have to work on when it’s critical and need to be done yesterday!
Examples of doing this could be a phone plan that scales up or down based on usage rather than the same every month – negotiate with your provider they may be able to help.
You may be able to get a better price point on some consumables if you buy in bulk and negotiate a better price or purchase from a different provided at a lower rate ongoing.
You may be able to have part time staff or team members on contracts that are casual rather than part time allowing you flexibility to scale up their hours when you need to and down when you don’t.
The key is to take a magnifying glass to your expense lines and see what can be done with each of them to really make a difference to your business.
Track them every month – see where changes can be made and keep being ruthless with these numbers until you have them where you want them!
Once you can cut your cloth to fit you’ll have both a more resilient business and a business model that will stand the test of time that could be the envy of other business owners and possibly replicable in other formats across the country or world even.
If you need help reach out or you may want to consider Business Bootcamp which helps you map out your expenses and plan for best and worst scenarios, among other things.