Our firm has been in the business of improving performance, profitability, and competitiveness for more than nine years. Lately though, once strong organizations have been pushed to the point of survival. Market contraction has left companies owning smaller pieces of a pie that once sustained them.
Some owners have taken the position that if they hunker down, eventually business will return to historic levels and so too will their fortunes. We believe that this is a dangerous strategy. We believe a fundamental shift has occurred that may take three to five years to return. In other words, this might be the new normal for a while.
Smart companied are using these times as an opportunity to retool their companies to create a viable and sustainable business model under the current conditions. Companies that adapt to a new reality will be in an even stronger position as volume returns to the system.
There is a lot though to improving organization performance. It requires company-wide change in systems and management style. It takes an understanding that the output of the company as measured in cash, earning and growth is a function of the structure, systems, skills, strategies and leadership.
Facing the Music
The hardest thing for the leader of any challenged company is to realize that the style of leadership required to be successful during ordinary times may not exist in the current management team. It takes great foresight and commitment to move decisively to recruit and rebuild a new leadership style. Often management structure and skills which were satisfactory during good times do not respond with the urgency, objectivity or skills needed when the business is threatened. This can be especially the case in family owned businesses where an entire generation may not have been exposed to threatening business conditions and therefore never developed the skills or mindset to face it.
Business decline can accelerate quickly. Leaders must act quickly and decisively to arrest the descent if they are to live to play another day. The business must stabilize itself to ensure viability before repair and rehabilitation can begin.
Back to Basics
In a stabilization and recovery process, emphasis must be placed on the basics of business operation. Simply put, you must triage the company such that it can survive the trip to the recovery phase and then onto rehabbing back to a strong organization and the field medicine begins with cash.
If cash flow is negative you have to stop the bleeding. This may require a healthy dose of belt tightening and tough decisions but it’s necessary. Cut every cost you can, to trim down to a level where the cash-in is greater than or equal to the cash-out. This should include a close examination of customers and product lines for profitability. Removing an unprofitable or nonpaying customer during difficult times may result in addition by subtraction.
Evaluate the necessity of every position. Some are required and certainly good people will be needed as business picks up again. But often deeply established beliefs and practices prevent management from being able to operate with less. Using an outside advisor can often help overcome the resistance and cultural roadblocks to a leaner organization. Resist the urge to rationalize or stall necessary changes.
In addition to cutting expenses, companies must convert value from non-liquid assets to cash. Working down raw and finished goods inventories as we’ll as taking an aggressive stance on accounts receivable can often generate the precious cash needed to finance a recovery. Even if a slightly higher price needs to be paid for the benefit of maintaining a smaller inventory, the price is often worth it.
Don’t mortgage your future either. Borrowing to pay for expenses you can’t afford only makes matters worse. Take a tough position on cash and live within your means.
No company every cut its way to prosperity so while trimming expenses and assets, equal attention and investment should be put into sales and other revenue generating opportunities. Push sales and service to the highest level in the company with all hands on deck. Look for opportunities to strengthen and lengthen connections to key customers. Build “partnerships” to enhance customer ties. Explore cooperative agreements with competitors, offer services that utilize assets. Stay alert to opportunities when competitors falter.
Keep the lines of communication open
Depending upon how distressed your company is you may have some critical issues looming with banks, other lenders or investors. Your bank does not want to own your assets and your investors won’t appreciate surprises. Communication can alleviate a lot of tension and is the key to maintaining the control and flexibility you need to execute your recovery plan. Often, an early and frank discussion of the problems you see and the actions you’re taking to correct it will go far in calming outside pressure. No matter the level and frequency of disclosure you choose, be completely honest in all communications with lenders and investors. Notwithstanding the outcome, you will have earned their trust and respect which will be helpful as you move ahead.
Get Expert Help
Without delay, get the recovery process started. Moving quickly is important for the troubled company and professional help can make a big difference.
Be selective. Hire a firm who has experience in all aspects of business. An outside perspective can often identify issues and drive action that company management sometimes just can’t see. Seldom is the root of the problem or the source of the solution in just one part of the company. Most downturns and the subsequent recovery require a company-wide cross-functional approach to be successful. Look for experience with business advisors. Look for intensity and commitment in the firm you hire. Your attorney or CPA may be happy to take the job, but they won’t have the focused experience or expertise to do it as well as a specialist. Neither do you.
What will professional help cost? Fees will vary depending on the firm and the nature of the situation. Nevertheless, good advice and council should be evaluated as an investment that will put money in your pocket. Depending on your situation, an experienced advisory or turn-around firm will likely ask for an up-front retainer. Our advice would be to find a quality expert, negotiate a fee arrangement that you can live with and which will incent the advisor with a strong success bonus.
Putting it all together
There are many companies today who are struggling, but which are only now coming to grips with their problems. In today’s economy, it’s never been more true that it’s not the big who eat the small but rather the fast who eat the slow. If your company is feeling the pressure, a strategy of accepting losses in the hopes of riding out the storm will result in further decline and hasten the point of failure. Today, companies who recognize and respond aggressively to threatening conditions with new models for profitable viability stand the best chance of succeeding in the new economic world.
