Money
Issue No. 24 - August/September 2005
How to keep from getting bogged
by Mr Geoff Thomas
As a private equity fund manager, I see a number of new business plans each week. Some are bold plans for the future: like concept cars at a motor show, they promise fantastic speed, but have never been on the road.
Some are from successful companies wanting to go to a new level: cars that are running well, have a driver who knows where to go, and only need more fuel to get to their destination.
But some are companies that are “bogged”: the wheels are spinning, but the only result is that they are getting stuck further in the mud.
Bogged companies are those with declining sales and declining margins. Initially, it is put down to a poor year for the industry, or increased competition. But after a while, it begins to become apparent the company is in a period of decline.
The easy solutions are not available to the company :
- it can cut margins to boost sales, but margins are already falling, or
- it can increase margins, but by boosting prices, is at risk of a further decline in sales.
The company has to perform some drastic action – generally cutting spending. While there are probably some overheads that can be cut, other reductions in spending hurt the company.
If you cut sales and marketing expenses, you cut this year’s sales. Cut research and development and you cut next year’s sales.
Unless the company is managed very carefully, this can be a downward spiral. Usually, bogged companies arrive on my doorstep when it is too late — the value the company had a few years earlier is gone and the capital injection they seek is needed to save it, rather than to expand the business.
To avoid the downward spiral it is important to take some proactive action while the company is doing well.
Some industries are very reliant on manufacturing. Companies in these sectors need to keep their costs down by investing in modern plant, or by manufacturing offsh...
