The Revenue-Expense Wave Effect
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In your business, as in many businesses, you may find that expenses tnd to remain somewhat inert while revenues may significantly fluctuate. Said in another way, revenues have a greater amplitude than expenses (taken as a whole), and adjustments to expenses tend to lag behind changes in revenues. In practice, many companies (perhaps yours is included) tend to be reducing expenses as a reaction to declining revenues, but are making those cuts , ironically, just as revenues are beginning to climb again.
This lagging expense adjustment period tends to create periods of loss, and periods of unsupported revenues – in a perfect world (unlike the one we all live in), expenses would react immediately to changes in revenues – but they just don't. The longer this expense adjustment period, the greater the business' potential for periodic and recurring losses. Conversely, the shorter this adjustment period, the greater the business' potential for capturing the maximum profit opportunities.
Of course, your business is limited in its ability (regardless of how vigilant management is) to cut expenses to the extent that some of these expenses are actually fixed costs, some of them may be subject to unseverable contracts, some of them are a function of relationships that cannot be traumatized, and some of them represent the expense associated with items which must be ordered in advance (and which order quantities are based upon anticipated revenues) and costs which are the result of collective bargaining.
List each and all of your business' costs (fixed, variable, semi-variable, etc.) and analyze 1) the time period required to adjust those costs (if applicable, i.e., not fixed costs); and 2) the consequence (or incidental cost) of adjusting each of those costs. Prepare these in a tabular format.
Create a rapid feedback reporting system regarding revenues. Know your revenue position on a daily basis, and be certain to note any trends which persist for more than a few days. If the trend is upward, that is wonderful – pat yourself, as well as your marketing, promotion and sales personnel assets, on the back. If the trend is down ward, trigger the alarm bells early on and adjust the expense items which can be adjusted without traumatizing your business and its vendors.
When revenues are on the decline, be an early responder by making rapid expense adjustments as can be tolerated, and by also addressing the reasons that revenues are spiraling downward (i.e., seasonal demand, competition eroding market share, customer satisfaction issues, etc.). The key, as it always has been, is to constantly monitor your company's performance in all aspects.
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trends, cycles, revenues, expenses, business, fixed cost, variable cost, semi-variable cost, monitoring, expense adjustment, GEIconsulting, Douglas E. Castle
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