A business danger signs may be ignored or unnoticed, much like a frog in a pot of water on a stove. Yes, I am talking about the the experiment with a frog and a pot of hot water. If you put the frog in the pot and the water is boiling, he hops out fast! But when you put the frog in a pot of room temperature water and then turn on the heat, he won’t notice the gradual rise in temperature and fails to hop out. The gradual rise in temperature prevents the frog from recognizing the danger signs. (Okay animal/amphibian/reptile lovers I am sure you are cringing at that example, but it makes my point so stay with me.) When your business hits an acute crisis you notice it, you take action. Like the frog you jump to it and move to get out of danger. But how do you act when the changes that are putting your business in danger are gradual, steady, and small—accumulating the risk, the danger, and the damage slowly overtime? Are you the frog in the pot not noticing the rising temperature?
I’ve been writing some very specific articles on how to deal with the rising pressures on businesses coming from changes in regulations (minimum wage, overtime, and other regulatory compliance issues), but I want to talk in more general terms in this article about developing a process for monitoring, quantifying, and adapting your business to changes in the labor, financial, economic, and regulatory environments that impact how you operate.
Whether you are a small business or a huge international corporation, situational awareness and long-term strategic thinking and planning must be part of building and maintaining your business. If you are not up-to-date on the external factors that can and will impact your ability to do business, the days you will stay in business are numbered. As much as we may want to ignore the news, changes in regulations, and what competitors are doing, what the latest technology is, etc. we can’t afford to (feel the temperature of the water heating up?).
It is costly to be reactive rather than proactive in addressing change. Businesses that wait until “they have to” deal with something usually spend more money on a solution than the business owner who is aware, takes time to understand the what needs to be done, and identifies multiple approaches or alternatives to solving the problem. I have seen many businesses ignore changes with not only real financial impact but also legal consequences for non-compliance. For example, let’s say that sales tax rules and rates change mid-year in a business. The business owners or managers that don’t monitor those changes (btw you usually get a sales and use tax change notice in the mail from the state(s) you do business in)—or worse, know about the changes but think they will deal with it later—too often find themselves on the hook for unpaid taxes, fines and penalties. One recent client did not implement the changes in their sales process to charge sales tax on labor. They failed to collect an average of 7% sales tax on transactions from the customer and as a consequence when we sat down to get them compliant and up-to-date they had a huge tax bill that came straight out of profits. To add insult to injury, they weren’t making a 7% profit on the sales, so they went from 5% profit to 2% loss on each sale. (The water is boiling!)
So whether we like it or not we have to:
- Understand what to monitor: municipal, county, state and federal regulations on taxes, reporting, hiring, etc.
- Understand what changes are planned, scheduled or have been retroactively (my favorite—how can you comply with something that was created after the fact …) implemented.
- Translate the changes into dollars and sense (yes common sense, not “cents”).
- Identify alternatives for making the changes: will you need a tax expert, different accounting software, to get a staff member trained? What do you need to do to proactively prepare for the change?
- Make a decision on which alternative is maximizes your results and manages the costs.
- Develop an implementation plan.
- Work the plan.
Many businesses need to get help with these steps, especially when multiple changes it the business at once (think minimum wages increasing, changes in overtime rules, changes in sales and use tax). The ability to accurately analyze and apply simultaneous changes and run scenarios to find the best solution for your business will often require developing financial models and forecasts to run what-if scenarios.
Below is one example of a model I built to analyze the impact the new overtime (OT) rule would have on labor costs and staffing plan for a California retail business. I developed different staffing plans. The second step in the process after addressing new OT rules was to do the analysis on the minimum wage increases that are planned. We looked at OT rule impacts, minimum wage planned increases, the Affordable Health Care Act, and several other layers of analysis to develop the best economic model for a retail business operating in California.
If you feel overwhelmed when you think about developing a strategy for your business to deal with complex changes in regulations and other factors, then make the investment to work with someone who knows how to work with you on the analysis. Let them develop tools and systems that will enable you to stay compliant, profitable, and in business. Changes will continue to happen and you can’t be the frog in the pot. You have to be aware of what is going on around you and act before you no longer have choices.
Copyright ©2016 Lea A. Strickland, MBA MA CMA CFM CBM