Navigating Uncertainty

I am back from my self imposed sabbatical on blogging.  I recently put together a presentation on growth strategies for small business and I have recently developed a forecasting template that analyzes past financial performance and allows a business to forecast different scenarios for the future based on managerial decisions business owners can make to increase profitability.  It begins with the basics:

• Increase Margin (raise prices, reduce supplier costs, increase productivity)
• Increase Volume (get more customers or get each existing customer to purchase a bit more)
• Decrease Expenses (reduce operating expenses by eliminating waste and negotiating cost savings)

There is a simple law of business management that holds true as strategies are developed to increase profitability - Every decision will have a consequence.  Unfortunately, forecasting the results of decisions are based on numerous variables and unknowns.  There is no certainty in the future and developing business projections involves taking the logic and facts of past performance and stepping into an abstract world of possibilities and uncertainty.


I stress this fact because anytime I present growth strategies that involve raising prices or increasing volume to clients, the most common response I get is, "Are you kidding? In this economy?"  No, I am not kidding; whether times may seem good or bad at the present time, there will always be an uncertain future.


Our economy is a fluid that flows with the individual pricing decisions of producers and the purchasing decisions of consumers.  It changes constantly based on a sum total of a series of small decisions made by business owners of all sizes; it is not a year to year change, but literally an hour to hour change.  In the world market place there are many entrepreneurs who seek to chart a course to maximize their earnings in this great ocean of activity and there are others who just go where the currents take them.


Obviously, I support setting a course for action.  Still, some will say that the tempest of today's economy leaves too much uncertainty.  I struggle to understand that rationalization for inaction in business development.  When was the future ever certain?   Predicting the future will always be uncertain.  We can't control the consequences, but we certainly have the power to influence them with our actions.  


Business planning is about developing strategies to influence market share, and at some point an entrepreneur is going to have to take some risk and make decisions to increase market share and maximize profits.   Getting more customers to purchase from your business may involve investing in more marketing.  Perhaps there are more product/service lines that you can add to get more customers to purchase from your business, or you can increase your inventory to make sure you can have what your clients want, when they want it.  Or maybe your product and services are slightly under priced and you have the opportunity to get a bit more value from each transaction.  


Business is holistic process of decision making where you the producer develops a product or service that offers value to the marketplace.  Consumers make decisions based on value comparisons that include quality, trust, service and ease of possession;  while price certainly figures into that equation, it is not the be all end all determining factor.   This past article in Bloomberg Businessweek sites an example of a combination of pricing strategies, marketing and quality propositions that have contributed to one businesses' continued success in making them a market leader, even in the gloom and doom world economy represented by our media.  While I don't agree with all of the strategies noted in this article, it makes some interesting points about consumer behavior to stress that price is not the only influencer in purchasing.


As you develop your set of growth strategies, be mindful that what you hope to happen may differ from what actually happens.  Any decision can have negative consequences if efforts made to increase profit come at too great of an expense.  Pricing strategies need to account for a potential loss of sales volume, marketing plans need to produce results and production efficiencies need to be properly managed.  No growth action plan is bullet proof.  


So how do you control your businesses' destiny with so much uncertainty?  Setting a course of action with clearly defined expectations of performance is the heart to any successful plan.  Measure those results and make adjustments if the market reacts differently than expected.   While this may sound too simple to be effective, I have found that few small business owners actually go through this process.  When I ran my own businesses, many of my decisions were based on intuition and my judgment on effectiveness of decisions were often based on rationalizing success (who wants to be wrong?), rather than a fair analysis of actual net profit performance efficiencies.


I've since learned that a more frequent review of your P&L Statements and Balance Sheets will provide indications of whether your strategies are working effectively.  Growth strategies should be based on a combination of profitability and return on investment efficiencies.  Your financial statements tell a story of the past and improving performance is an exercise of replicating those successes and repairing any inefficiencies found.  I can't stress enough the need to review return on investment in your growth strategies, as well as profitability.  There are many tools at your disposal to increase growth and if you take a small net profit increase and look at that as a complete success, you may be missing other opportunities for growth that can give a larger net return on your efforts.


Another point I would like to stress is that profit growth strategies are as fleeting as the future; once realized, they are past history and the future will bring new challenges and opportunities.  Business planning is a never ending process and it's never wise to fall asleep at the helm.


Vincent Van Gogh once said, “For my part I know nothing with any certainty, but the sight of the stars makes me dream.”  Most business owners see a prosperous future in the stars, but it those who make a plan to reach for them who are more likely to achieve success.