Pricing and forecasting struggles of SMEs
19 November 2010 Leave a comment
Australian small to medium-sized enterprises (SMEs) need to focus more on accurate forecasting and are struggling with the pricing of their products and services, according to a new report by Newport Consulting, as reported in The Boardroom Report, Volume 8, Issue 22, 17 November 2010 …
[Entitled 'Managing in Uncertain Times: The Current State of Play', the annual study tracks the business confidence and management behaviour of Australian and New Zealand business.
It found that while a higher percentage of SMEs expect growth of above 20 per cent for the next 12 to 36 months, many are being squeezed by rising business costs but are not passing these on via increased prices. They are, instead, opting to absorb the increased costs into their businesses.
Newport Consulting managing director David Hand observes: “Few businesses have the luxury of choosing their selling price. Most of us have to take what our competitors and customers dictate. Some businesses may operate on a cost plus basis. Provided you understand your input costs and do not distort them through allocations of overheads, you can at least know the gross profitability of the product or service.”
His general advice to directors of SMEs would be to make as many input costs as possible variable. “By this, I mean making a commitment to increase or decrease the cost in line with volume fluctuations. An example of this is the use of contract labour compared to permanent staff. Permanent staff members are a fixed cost in that they are paid even if there is no work, but contract staff can be brought in or laid off as work comes and goes and are, therefore, genuinely variable. This is why labour market flexibility is so important to SMEs in the 21st century.”
On the issue of forecasting, Hand says: “Fundamentally, a forecast is a guess about what conditions are going to prevail in the future. If plenty of data is put in and variables are few, the forecast can be very accurate. SMEs let themselves down if they look at uncertainty in the future and then say: ‘It’s too complicated and I can’t forecast’. The risk in this is that plans and budgets will be more influenced by the desire of management and not fit with outcomes.”
Hand believes SMEs struggle with issues such as pricing and forecasting because they lack the space in their management time to look at them and address them. “Most time is allocated to the grind of doing business – sales, production, customer service and handling problems and complaints. Add to this the internal tasks of hiring and managing staff, managing debtors and creditors and there is not much time left to develop an understanding about a possible process improvement that may enhance a product or reduce an input cost.
“My advice to people in this position is to create disciplined space to work on the business. I know quite a few small business owners who claim to work seven days a week just to stay in business. It’s hard to tell them to take a day off, but the cold fact is that if they must work seven days, they don’t have a viable business. The same could be said about business improvement initiatives. If you can’t make time for it, you probably won’t survive in the long-term. This is, therefore, about disciplined structure of time allocation rather than sheer lack of time.”]
If you’re struggling with pricing, forecasting and allocating time to working ON your business, take a look at www.MultiCOACH.biz/events and register yourself to attend one or more of the workshops listed there.
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