What is Fat? What is Muscle?

What is Fat? What is Muscle?

Just like Fat Bear Week do you have some reserves to get you through the next year if things turn down? Maybe like they did in 2008?

Probably the best way to think about this is to concentrate on the effective things that good leaders did when things went south in 2008 and start thinking about getting ready to do them now.

1st Step – Margins, margins, and more margins

Which income streams are making you money? Which clients are making you money? Great businesses know this inside out.

2nd Step – What’s fat and what’s muscle?

We have all heard people talk about this and I think that the traditional way of thinking that costs are either fat or muscle is wrong. Costs are the use of resources, they are types of activity. Muscle and fat are more like assets, some productive and some not.

This isn’t about costs, you should keep costs under control through good times and bad. And no time to start like the present.

If it is a good income stream it is an asset, it is “valuable” because it earns you money. You should be able to sell it.

So maybe don’t “cut ” the fat, but burn it!

The marketing terminology for products that are becoming less productive is “cash cows”. You should stop investing in them and run them down. Or sell them.

Once the marginal revenue of a cash cow is less than its marginal cost (and looks like staying that way) you should close it down. Note that does not take into account any allocation of overheads.

3rd Step – Allocate resources to activities that bring in good margins

You need to do step one to know what they are.

4th Step – Don’t stop investment but reduce risk and require a faster breakeven

Don’t throw the dice on left-field plans, stick to what you are good at. Many a failing retail shop has hastened its demise by deciding to stock something completely different. Like a clothes shop selling flowers. It might work sometimes but the risk is similar to a brand-new small business startup. So there is a good chance it won’t.

5th Step – Make the cost of core functions more flexible

Your biggest cost will always be your people and, hopefully, you have good people that you pay well.

While I don’t think that employees should be made to share in your risk I think it’s fine that well-paid people only do well when the firm does well.

How you go about this will vary depending on your industry and circumstances.

6th Step – Make the cost of non-core functions flexible

Basically, this means outsourcing to experts that are more efficient than you because it is their core business and they can respond quickly to changes.

7th Step – Improve your feedback loops

Measure the right things and measure them more often. Look at sales pipelines, performance, and cashflow, weekly.

Photo by Mark Basarab on Unsplash