The 10 Rules of Management Economics You Must Know
10 Management Decisions That Drive Business Success
Making financial decisions is not limited to just those managers who work in the Accounting department. For both small business and large corporations, whether we realize it or not, every manager and business leader makes decisions on a daily basis that affect their organization’s costs, finances and performance. We at MRH like to refer to this as management economics; that is, how the guidelines and policies by which we run our organization affect its overall success. In a true economic sense, a nation’s fiscal policy is often the first thing to be credited or blamed for its success or collapse. In business, the decisions managers make and the policies they set – even on subjects completely unrelated to finances – always have financial consequences. Moreover, these directives can have a big impact on a business, and in some cases, may actually influence its long-term success. With that, here are our 10 Rules of Management Economics the every business leader must know.
1. Time Is Money
We often hear this phrase, but what does it really mean? Well, for starters it means that every hour our employees work, we are paying wages. Every minute a machine is running, we are paying for energy and maintenance. Whether those people and machines are working efficiently and on the most value-added work is up to us as managers and business leaders. In just about every activity our organization performs, there is a cost. Because of this, the first rule of management economics is to focus on efficiency, maximize output, and minimize downtime – all in the name of avoiding unnecessary cost. Before brushing this off and reading on, ask yourself these three questions:
- Are the processes you follow in your business as efficient as they can be?
- What affordable investments can you identify to improve the efficiency of your operation?
- Have you talked at length with workers to get their ideas for eliminating waste and making your operation run more smoothly?
2. Demand of Work Must be Met By Supply of People (And Vice Versa)
Few managers will ever say they are over-staffed. In fact, according to MRH research, 35% of managers say their single biggest problem is simply not having enough resources. But as frustrating as this is, successful organizations and business leaders know that the amount of resources in the organization must both rise and fall with the demand for work.
If our work demands increase but staff size stays the same, customers suffer and eventually leave in frustration. By contrast, excessive hiring without a demand for work and income will quickly lead to financial losses of the organization unless cuts are made. The bottom line is that scaling our organizations up and down in size based on the demand of the marketplace – hard as it may be – is required for success.
3. Forecasting Accuracy is Equal to Credibility
When Chief Economists for corporations and nations speak, their words carry weight. Economic projections by such people are used by organizations around the world, and serve as the basis to forecast market outgrowth, sales increases, and profit values. Their forecasts, therefore, must be realistic and accurate.
The same concept applies to managers who set budgets, forecast spending and plan sales revenue. Our financial projections as business leaders set expectations and drive a significant amount of financial planning activity; therefore, these forecasts and plans must be both accurate and realistic. Setting unrealistic goals leaves an organization scrambling just to meet metrics instead of taking care of customers. Ultimately, the accuracy and feasibility of a financial plans is equal to the credibility of the organization.
4. Value is Subjective
The term value can be defined as a given product or service for which the market is willing exchange money. But what you provide in exchange for the price of the goods or services may be different from one customer to the next. One customer may be willing to pay more for speed; others may be willing to wait in order to get a lower price. The key management decision is understanding and knowing what the customer wants, such that the appropriate value is offered.
Examples of possible things customer’s may value and benefits that may trigger a buying decision can include:
- Speed of delivery / service
- Quality and reliability
- Customer service and support
- Regional or location preference
- Affordable price
5. Budget Unspent is Budget Lost
Budgets are the byproduct of financial planning and forecasting, and no one likes unwelcome surprises when it comes to money. So while fiscal discipline is an essential duty in meeting budgetary commitments, we must equally be aware that any budgetary under spend at the end of a financial cycle disappears; there is no guarantee we will get extra (or even enough) in the next cycle.
By no means is this rule to suggest that management and business leaders should spend irresponsibly. But it does mean that people who make financial decisions should be opportunistic when a budget allows. Toward the end of a financial period when there are extra funds available, find ways to use them that benefit the organization in some way. You may wish to upgrade that old conference room projector, or to buy a new coffee machine for the break room, or to send an employee to that industry conference they’ve wanted to attend the last few years.
6. Income is Only Generated When A Market Exists
There are many great ideas out there for products and services. But generating cash and making a profit requires a product or service to have a market willing to pay for it. Before investing significant funds to develop new products, technologies, or services, be sure to engage the market place to verify there is indeed an interest.
Here are just a few ways one can test a product or service with the market:
- Offer it for free to get feedback from customer
- Create a focus group to provide market opinions
- Offer a gift card in exchange for customers trying the product
- Hiring a consulting firm with deep expertise of the industry
A Real Example of Testing Market Interest:
A large manufacturing company had plans to develop a new product for its market. Doing so called for approximately $2M of total investment. However, by the time the company spent about 25%, or $500,000, of the budget, it had enough of a product to share with its customers in order to obtain feedback. As it turned out, the reception from a wide spectrum of the firm’s customer base came back with mixed reviews. But it was one key customer that summed it the best: “This is an interesting idea, but it is not one of our top 50 problems. We would not spend money on it.” Though disappointed in the feedback, the manufacturing company immediately ceased investing in the project to reallocate funds elsewhere. All work performed up to that date was archived should there be future market interest.
7. The Total Amount of Goods Purchased by the Market is Equal to the Total Amount of Goods Sold by Sellers
For a given product or service, there is a given market size at any one time. As is the case with an open economy, virtually every product or service offered by a company will have competition for the very same buyers in that market. Our portion of that total market is what is known as market share.
An Example of Market Share:
Assume that in your city there are 100,000 cups of coffee sold each day. Your coffee shop sells just 4,000 of those cups of coffee each day. Thus, you have 4% of the market. In order to grow your coffee business – and increase your market share – you need to find ways to sell more than 4,000 cups of coffee.
Successfully generating an income means we have some portion of the market share. Growing our business means we are beating the competition and increasing that market share.
8. Growth is Proportionate to Health
A key measure of a healthy economy is growth. In a management context, growth is also used as a measure of success – growth of sales, improved operating efficiency and happier employees. The best way to understand the health of an organization is to measure its growth – and we can do this through selective use of metrics.
There are infinite number of metrics one can create for an organization to measure growth. But in order to select the right metrics, we need to first define success for our organization, and what we care about most. Whether we choose to track employee satisfaction scores, the number of new customers we gain each year, or the number of units we ship each month as a metric, we must be selective with our choice few.
9. Policy Has Two Dimensions (Internal and External)
Just as nations set policies to control internal inflation and domestic tax rates, they also set external guidelines for trade and relationships with other nations. They do this to maintain internal stability and to manage external influences. Thus, economic policy is two-dimensional, having internal and external components.
The same holds true for managers and business leaders who set policies and rules for their organization. Whether deliberate or not, every policy or guideline that is set has an effect both internally or externally. The key management decision around policy is to ensure the internal message is aligned to desired external effect (and vice versa). For example, a highly regulated internal business culture will conflict with the same company’s desire to be competitive, flexible and responsive to the market. Resolution is a matter of priorities.
10. People are Assets
The last law of management economics is similar to the first – a phrase we often hear, but rarely explore. Businesses and organizations frequently state that their people are their great asset, and for good reason. Whether you are a small medical practice, a large government agency, or a global manufacturer of electrical devices, great organizations are built on the talents and skills of great people. Hiring the right talent, whose skills, knowledge and expertise fill a need in the organization is of utmost importance.
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