In a crisis, like what we’re experiencing with Covid-19, should businesses focus on the “top-line”, (gross sales), or the “bottom-line”, (profit after expenses)? Each have their own pros and cons, with long-term repercussions from each decision. So which should businesses do in times of crisis in order to keep their organizations solvent and sustainable? Of course, it depends on each business, but listen to Jenny Rae, ex-Bain consultant, as she gives her take on why businesses should focus on the top-line in crisis situations.
Why Businesses Should Focus On The Top Line In Crisis: YouTube Transcription:
Businesses in crisis have three choices: focus on the top line, focus on the bottom line through cost-cutting, or do both. And in this video, I’m going to talk about why option number one, focusing on the top line, is my preferred course of action for organizations that I advise. I’m going to talk about why this is important, because many organizations immediately think about how they can cut costs in a time of crisis. And it’s a natural response. It’s a fear-oriented response of not having enough cash to cover your expenses over a time. And for many organizations, especially variable cost organizations, that can be right. Why would you order the same amount of food if a restaurant isn’t going to serve as much. Why would you order as much product if you’re not going to sell as much. But, at the same time, there are a lot of businesses, fixed and variable cost, that would do well to follow the advice that I’m going to offer because it will set you up for longer-term success. So let me walk through my three reasons why businesses should focus on the top line in crisis.
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3 Reasons Why Businesses Should Focus On The Top Line In Crisis
Disruption Offers An Opportunity To Change The Way That You Relate To Customers
Number one as to why businesses should focus on the top-line. Disruption offers an opportunity to change the way that you relate to customers. This includes the products that you sell them, the services that you sell them, or it accelerates a timeline of integration or rollout that you might have already had in the works. What do I mean by this? Well, organizations that historically have not been virtual are more open to engaging in a virtual environment. Organizations that are more likely to be non-virtual have a challenge of figuring out how to engage with their customers. And if their first focus is on cost-cutting instead of rolling out a new product or a new service that is in a new world, they immediately think about how they can reduce the time and effort that they spend organizing what they are doing.
So disruption offers this opportunity to listen to your customers that you currently have that you can’t serve, or wouldn’t serve in the same way. To hear about what it is that they want or are willing to do to engage with you. You can hear about what they are looking at in other places and take share from potential competitors or alternatives that are popping up on their radar.
And you can gain a focus for how your business can grow an entirely new business line in the future. Because virtual and these new products and services are simply unmasking an unmet need, not actually creating an unmet need. So disruption offers this opportunity to provide new relationships, new services, and new products on an accelerated timeline. In addition, it’s an opportunity to test them in a really frequently variable environment so that you can test it today, and test it tomorrow, and people are more willing to try something out if they have a relationship with you already. So it’s an opportunity to build new revenue streams, and new relationships.
Focusing On The Top Line Uniquely Builds Company And Team Loyalty In Crisis
Number two as to why businesses should focus on the top-line. Focusing on the top line uniquely builds company and team loyalty in crisis. One of the main things that teams worry about in crisis is the disruption to their own personal livelihood. Whether or not the company will exist, whether or not they will have a job. And focusing on the top line gives everybody something to reach for, something to achieve, and something that preserves, in a roundabout way, exactly what they are worried about losing. So if you get together, focus on new products and services, and take that to the next level, it enables you to keep your team, to keep your company, and to build the loyalty that you have for future dates.
Cost Cutting Can Disrupt Business Recovery Later
And then number three as to why businesses should focus on the top-line. The reason that cost-cutting can be so damaging to organizations is that it can disrupt business recovery later. So while it may seem like a great short-term effort to cut your costs now, if you lose people, or you lose supplier relationships, or you lose leases, or you lose opportunities, then you miss out on those cost-cutting chances that you took. Because those decisions will affect you later.
So, let’s say, for example, you let somebody go inside your company and they’re good, but you are worried about not being able to maintain payroll for them. Sure, fine. Totally valid concern. However, if you’re going to grow again at some point, and if that person was necessary, then you’ll need to rehire. And now you need to go through the extensive hiring, training, and onboarding process. And so sometimes there are hidden costs in cost-cutting that aren’t completely factored in. Now, let me say this. It depends on the type of company, whether or not you can forgo cost-cutting at all.
So top-line growth should be the primary focus of every organization. Getting more revenue through the door, having more of a focus of people maintaining the business, building the business for the future, identifying and pivoting into new products and services. All of that is good. You should always do that. But in some organizations, you will need to take option number three, which is focusing on cost-cutting and revenue generation at the same time. And cost-cutting will be deferrals, cost-cutting might be a portion of expenses. We’re seeing a lot of companies furlough their employees one day a week, not five. So they’re actually working to maximize efficiency in the other four days, but reduce the pay and the time worked for that extra day. And because of that combined focus, it really changes the way that everything can work together.
It Matters If You’re A Fixed Or A Variable Cost Business
In addition, it depends on whether the company is primarily a fixed or a variable cost business. For a fixed cost business who took a sharp decline in revenue, it can be devastating because you have almost nothing to do, except for cutting costs to respond. And the short-term cash burn of keeping those costs up can decimate your business.
And so you have to have either significant cash on hand or cut costs. It’s really not an option in a fixed cost business. In a variable cost business, you might have some more flexibility. You can reduce some of your input expenses, or delay them, or defer them. Not in a way that damages your core business, but in a way that simply is adjusting to the demand of business. So variable cost businesses do have a little bit of an easier time managing changes like Coronavirus. They are able to push out their delivery timelines, push out manufacturing, push out their services. Sometimes even push out labor, and that can be attractive.
Value Your Human Capital Through Focusing On The Top-Line
In addition, some companies have a very highly valuable human capital, people that are difficult to source and difficult to train. These companies are going to want to be more sensitive to not letting those human capital go. Or risk get disgruntled during a time of crisis. Whereas those that have more replaceable human capital, and humans are never replaceable, but in some organizations it’s not hard to find somebody else and train them to do a job that was already there before. It might take one day, or a week, but not a year like it could in some other roles.
So having the right people in the right roles might be worth maintaining rather than having to go through the hiring process again. So again, businesses that are variable cost have a little bit more flexibility. Businesses that are also focused on labor, that are really, really high performance, that take a long time to train and integrate into a culture, they’re going to be a little less focused on some of the challenges and the changes. They’re going to work harder to maintain those.
Managing Through Crisis Example
I’ll just end with a quick story. When I was at Bain, it was explained to me that some of the success of Bain over time had been through taking this exact strategy (focusing on the top-line). When other people saw a downturn and pulled back on growth, Bain accelerated into the downturn. How did they do that? They invested in their people, they maintained a no layoff policy and kept cash in order to make sure that they could do that, even in times of radical disruption. And they pursued new lines of business.
In order to do that, they brought all hands on deck to focus on the new lines of business. And then they were able to add after the downturn 2 to 3 years before their competitors, more aggressively enter new markets, build market share, and build products, or build onto the products that they developed. I would have never thought of this as my primary mode of operating unless I had been at Bain. I would’ve thought in a crisis, you conserve cash. That would’ve been my natural focus. And it changed fundamentally the way that I think as a business operator, the way that I think as an investor, and the way that I think going forward in advising other businesses.
I hope that you took a lot away from this episode on managing cash in the top line. If you find yourself in a crisis and want somebody to help you navigate through it, we’d love to help at Management Consulted. And if you’re learning about companies in crisis to operate your own company, or to learn for case interviews or case studies, we are super happy to engage with you. You can find lots of great content on this channel, on our podcast at Strategy Simplified, and at managementconsulted.com.