Turning challenges into opportunities, managing effectively in an uncertain economic climate.
Companies must consider the effects of the current economic climate and what it means for their business and its survival. There are two key questions everyone needs to consider:
· What do we need to do differently?
· What do we need to do better?
The secret of success will be getting the simple things right rather than embarking on wholesale radical change in every aspect of your operation. The following practical steps can be taken to minimise negative effects and position your business to emerge stronger when economic conditions improve.
1. Understand the true impact on your business
In difficult conditions, the most successful businesses are the ones that react fastest, take the tough decisions early and lead rather than follow. Define your new strategy, share it with your team and make sure it gets actioned. Assign your key people and make them accountable for targets which are in line with your revised strategy.
2. Identify unprofitable products and customers
When resources are limited, it is critically important to know the profitability of individual customers and products. It doesn’t make sense to use scarce resources, such as cash or management time, in delivering products or services at nil or negligible profit.
3. Cost reduction & Cost control
These must be a prime focus of management and you should start with a blank canvas.
· In the short term, target discretionary expenditure – segregate the essential from the “nice to have” and limit your spend accordingly.
· In the medium term, assess the value derived from each significant cost category and identify where savings are possible. Focus on procurement, inefficient work practices and waste. A key action is to increase cost consciousness throughout your business, get everyone involved and reward measurable contributions.
· In the longer term, cost reduction focuses on reducing your business break-even point to as low a level as possible. Minimise your vulnerability to a downturn by making costs variable rather than fixed. This involves examining just about everything in your business such as the market your business should be targeting, your product or service offering, the opportunities for outsourcing manufacture or support functions etc. The threats presented by the current climate will help persuade all stakeholders of the need for regular reinvention.
4. Manage working capital efficiently
Reduce your reliance on lenders to finance working capital and reduce the risk of loss through stock obsolescence or bad debts. Focus on:
• Cash collection. This should be proactively managed, consider deploying additional resources to the credit control function, or offering customer incentives such as early payment discounts. Ensure that you issue invoices on time and stay close to who pays you.
• Incentivising your sales team at the cash collection point rather than when the sale is made.
• Paying your Suppliers in accordance with agreed credit terms and not before due unless attractive settlement discounts are on offer.
• Maintaining Inventory balances at the minimum level consistent with agreed customer service levels.
5. Financing arrangements
Inappropriate financing arrangements can mean that borrowings are unnecessarily expensive or that your business has insufficient flexibility when cash flows are tight. Focus on repaying the highest interest-bearing loans first. Debt funding is still available to companies with a well thought out business plan and robust cash generation capability. There is competition in the market for such refinancing and this can mean that more attractive terms may be available. Consider alternative sources of finance such as asset-based finance or leasing. Your focus should be on getting the right debt financing for your business. Identify (A) what is available in the market, (B) the structure that best suits your business, (C) consider any tax implications of refinancing and (D) negotiate effectively with your lenders.
6. Forecasting & performance management
Focus on what should be or could be happening in your business rather than solely on past performance.
Effective forecasting and reporting are critical to both effective planning and day-to-day management. Timely, benchmarked, feedback is essential for sound decision making.
In the short term, focus on a limited number of key performance indicators. These measures should be easily understood and have a focus on cash generation. They should be formally communicated, and managers should be encouraged to deliver on them.
The medium-term perspective requires a strong financial forecasting capability. Rolling forecasts should be produced as a matter of routine and they will provide management with the necessary flexibility to plan for likely developments in the marketplace on a timely basis.
7. An experienced and well-resourced finance team
The current economic climate produces new challenges for all parts of an organisation, but the finance function will come under particular pressure to meet the increasing demands for information to support initiatives throughout the business. The resource needs in this area in terms of people, experience and IT support must be a priority for senior management. Short term needs can be met by outsourcing while the longer-term requirements of the business are assessed.
8. Communicate with your stakeholders
Managing the stakeholders in your business is critical, especially in challenging times. The key to effective management of all stakeholder relationships, whether with shareholders, employees, customers, tax authorities or lenders, is timely and honest communication. Withholding information or springing surprises will unnerve people and erode their confidence in your ability to manage the business. It is important that you keep all stakeholders informed about the threats and opportunities to your business and what you are doing to manage them.
9. Manage your key talent effectively
Engage with your people and be open with them. Ensure you motivate and develop your team. Watch for pressure points. There is currently a shortage of experienced people in the market and the cost of recruitment can be high.
Addressing the points above will help ensure your business is agile, re-energised and fit for the future. These 9 steps should be reviewed continuously within your business and not just in challenging times.
If you would like to discuss any of the points raised in this post, please email us on firstname.lastname@example.org