Business is Bad, Now What?

Traditional financial wisdom calls for hunkering down to weather the storm and make an across the board cut. It is a simple and popular approach, but is it the best solution in this downturn?

Not this time! In this economy the best solution is one that conserves cash and at the same time includes prudent spending to increase value.

First thing, regardless of your size, from three employees to 1,000, keep your stakeholders (employees, banker, key suppliers, investors, customers) informed and where applicable involved:

• The unknown drives fear. Do everything possible to eliminate negative surprises
  
• Hold a “state of the business” meeting with all employees to explain you need to conserve cash and work on improving the business during this downturn. Explain that the following needs to be done and that you want their creative input and help.


• Provide a method of communicating progress.


• Establish the shortest plan and review cycle possible.

Conserve cash:

Increase accounts receivable turns (collect more as a ratio to sales):

• Review every account payment history and set credit limits that will trigger a management review early in the collection process.
  
• Update the past due collection procedure to shorten the process.
  
• CEO to review all overdue accounts weekly and assure collection calls are made, don’t just rely on past due notices sent by fax.

Increase inventory turns (lower inventory as a ratio to sales):

• Evaluate each product, identify slow moving and no moving inventory.
  
• Slash prices on slow and mo moving inventory and send special sale offers to all customers that previously purchased those inventory items.


• Determine the fully burdened cost and resulting profitability of each product and service― drop low profit items


• Reduce safety stock on all items that don’t carry a large stock-out cost


• Adjust the economic order quantity model by doubling the carry charge


• Talk to your suppliers about drop shipment options

Decrease accounts payable turns (increase what you owe to suppliers as a ratio to sales):

• Talk with your suppliers to negotiate extended payment terms. IT IS NOT AN EASY SELL, BUT STILL WORTH THE EFFORT. You will need to assure them that they will get paid which means you may need to provide financial statements or other forms of assurance, and provide a rationale as to how they will benefit from extending more credit.

Do a return on investment analysis on every recurring expense:

• Rank expenses from highest return to lowest.


• Working from the bottom up identify what would be lost if the expense item was eliminate, make your cuts based on your analysis.

Human Resources:

• Explain in your employee meeting that you will be looking at job redesign to free up time and talent to work on value improvement. In order to do the redesign you will be asking every employee to keep an activity log for one week. In the log they will be recording what they did, start time, end time, and results.


• Evaluate every job description using the activity log to identify duties that can be eliminated or reduced in frequency, and for potential position consolidation.


• If sales volume or gross profit margin is declining reduce payroll accordingly


• Evaluate outsourcing work to convert semi-fixed HR cost to variable cost.

Why is this the time to increase value?

The Company that can move quickly, increase customer visibility and offer the best value WINS. If you wait until the economy is booming again, it will be much more difficult to increase value and visibility. In a downturn the resistance to change is lessened. Stakeholders will accept what may have been unthinkable when the market was robust. Customer are actively looking for better value and willing to try new products that hold the promise of reducing their cost.

We are not just talking about products here. Everything an organization does either adds to or takes away from the value of its offering. The goal is to make your company the most effective value adding machine in your marketplace.

How to increase the value:

• Review all your products, services, and processes; make a list of those that should be eliminated because they do not add enough value, list items that should be made to add more value, and items that are currently adding full value. Most of the items to eliminate will have been addressed in your cash conservation initiative, assign someone to address the new ones.


• Prioritize the items that have to be improved and assign.


• Focus your marketing efforts on the items that are currently the best value to new customers with an incentive to purchase now.

These tactics apply to retail, manufacturing, distribution, and the B2B service industry. Interested in a free consultation? Call 919.942.1634 or email Walt@Brittle.com