Complexity: the Silent Profit Killer

Everything should be made as simple as possible, but not simpler.” -Albert Einstein

In the evolution of businesses, most start small producing a single product or service. It could be anything from servicing a specific niche or developing a new use of technology. Generally the business succeeds and grows by doing that one thing well.

This success gives the business confidence and capability to expand. This expansion focusses on opportunities that have the largest potential for growth.

In expanding, one of the greatest challenges for a business is to avoid introducing complexity.

Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.” – Steve Jobs

Identifying Complexity

Complexity can be in the form of selling in many jurisdictions, buying an office or putting in a new piece of software. This leads to work facilitating the growth which is not directly related to selling the product. These costs are fixed, or at least very “sticky” as they don’t change in line with changes in sales volume.

There is another cost for businesses that is like the sticky costs of complexity. Debt! The costs of servicing debt and the level of debt impact a business’ risk profile and if things go wrong can cause a business to fail.

This is the same with the complexity. Sticky complexity costs continue even when there is a downturn in sales. This can lead to a drain of cash reserves. A sustained downturn can then lead to business failure, regardless of the quality or need for the business’ product.

Managing Complexity

When managing a business always look for ways to grow whilst minimising complexity and those sticky costs.

  • If selling in many jurisdictions use authorised agents rather than setting up a physical presence;
  • If you need office space, try to lease with options to extend, rather than buy;
  • Before installing new software, ensure you are taking advantage of all functionality in your existing software.

When looking at improvements, try to minimise the complexity added to the business. And if you take complexity away whilst improving the business, it will amplify the value created.

When problems present, looking for solutions which are the simplest whilst being effective. Make a habit of reviewing business processes to find further opportunities to simplify.

Understand what costs in your business are “sticky” and have the same regard to them as you would the costs of debt.

Doing this will give your business a better chance of success through lowering risk; and will ultimately create more value.

Justin Hogg is an Accountant and CFO for Businesses, Founders and Entrepreneurs. He manages the numbers so that you don’t have to. He offers an initial complimentary 30 minutes session to see if he can help you reduce complexity and add value to your business.

To arrange an initial, complimentary discussion, email me or call 0414 896 696.

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