Sancho Simmonds looks at the importance of flexibility in maintaining a successful business model.
In today's global and technology-enabled economy things happen more quickly than ever, so a business model which allows you to be nimble and flexible is a major benefit in helping you to prosper.
It is important to stress test your business model and plan for different scenarios so that you understand your options in the event of problems arising. Businesses with a high proportion of fixed costs can build profitability quickly once covered by revenue, because the majority of any incremental revenue falls to the bottom line. Other businesses have a low fixed cost element, but significant variable costs which are more related to revenue levels.
A key factor is knowing what levers your management team could pull to keep the business going if, due to the wider economic environment, revenue drops by 50%. You need to know in which order to pull those levers and which ones will damage the ongoing business least.
Here are some areas to consider in adding flexibility to your cost base.
Don't Plan Your Cost Base Around Unfounded Expectations
Some businesses build an infrastructure based on what they hope will happen at some point in the future. Such expectations are often based on events which may not happen as intended or even at all. For example, if revenue has been flat for some time, don't take on more resources to support increased revenue unless you can see actual evidence of growth coming through in your results.
Flexible Working Arrangements
Many people look for organisations with flexible working environments. Enabling people to work from home may give you access to a lower cost workforce, reducing the employee's personal cost of commuting and potentially increasing staff motivation, satisfaction and productivity. Some firms offer sabbaticals to staff during quieter times. This can often have a double benefit – a cost saving as well as increased staff satisfaction.
Part-Time Resources
Consider building up your staff resource slowly, using part-timers or outsourcing to support your growth. There are a number of organisations offering highly skilled, experienced individuals, for example finance directors and marketing directors, to work with businesses on a part-time basis. You can buy their time when you need it.
Lease Terms, Lease Breaks and Long-Term Fixed Price Contracts
Before signing up for a long lease, carefully consider whether it is appropriate for your business. What happens if demand for your product or service falls away or your needs change? Sub-letting part of a property, for example, is not necessarily simple or quick and may require additional investment upfront. So, where possible, build in flexibility by asking for appropriate break clauses.
Whether you are a buyer or a seller, long-term fixed price contracts may sometimes seem like a good idea. But further down the track the world can be a very different place and such contracts can be problematic, so carefully weigh up the benefits and risks.
These are just a few of the areas to consider. Think about them in advance and give yourself time to find the right balance. In particular, think carefully before taking on fixed costs which you may later live to regret.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
