Another week, another threat of a new tariff. Fortunately, this time businesses do not have to scramble to understand the implications to their Mexican supply chains. Those with Chinese supply chains aren’t so lucky.
Couple that with fluctuating interest rates, volatile markets and a continued haze of a pending market downturn, and it is really hard to plan and manage a business today.
Predicting where we are in this economic cycle is not the focus of this blog, we leave that to our financial partners at Sequoia Financial Group (outlined brilliantly here: Recession Opportunities). What we will outline is a more tactical plan for preparing for, and managing through, the next downturn — whatever that may look like.
>> Read "On (Yield) Curves and What They Mean in Terms of a Recession”
1. Prepare for the Economic Downturn Ahead — Now
From our experience working with businesses suffering from performance challenges, to the point where formal workout/turnaround advisory services are needed, there is one thing that is clear — it is not fun. Gone is the time to think about strategy and planning, as business leaders are forced to be singularly focused on survival in the form of debt restructuring, cash management and cost reductions down to the bare essentials. The suddenness of the Great Recession in 2008 threw many companies in this boat. However, you can find a dozen charts like the one below that show us what might be in our future:
One of the positives of all the economic downturn chatter going on in the market right now is that you should not be surprised when the next recession happens. In fact, these discussions will hopefully spark action and help you be prepared. Our friends at Sequoia Financial note some great ideas to get you started:
- Lean up: get a head start on cutting back on spending
- Have dry powder: start building your cash reserves
- Check credit lines: get loans lined up before downturn
- Consider waiting on large purchases: take advantage of downturn deals
>> Read all 8 steps in “A Checklist of 8 Steps Your Business Can Take to Help Turn a Recession into an Opportunity”
2. Find Your Inner Strengths
Competing from a position of strength is the ultimate goal. Depending on your particular industry and business model, there are likely other levers you can leverage to strengthen your business performance and financial footing. Tidying up some of these processes now will have a tangible impact on your business:
Sales, Marketing and R&D
Customer Management. A growing business often will make concessions to invest in new customer accounts or cut prices to get the revenue growth. Over time those decisions can clog up your business as you continue to dedicate resources to provide products and service to these customers. Analyze your customers now and trim the tail if they don’t improve:
- Increase prices on low margin customers
- Get more aggressive with customers that have aging accounts receivable (AR) balances
Product/Service Innovation. Again, a growing business is fueled by innovations to attract new customers or increase margins. However, each project drains resources on an organization, so a large pipeline can begin to have a negative effect, consuming costs and time. Govern your R&D process to limit resource outflows:
- Document customer segments; understand market opportunity of new projects
- Implement stage gate process to focus time and resources on only the most viable projects
- Explore outside partners to source innovative components and drive development without committing to fixed costs
Sales Performance & Compensation. When times are good it is nice to have additional people around to chase new opportunities and support new customers. Why wait until times are tough to make tough decisions? Increase accountability measures and align incentives:
- Use performance management processes to document employees’ value to the business. Remove the bottom 10% before you have to; you will realize an impact to both culture and performance results
- Reconfigure your compensation system to increase the incentive compensation component; this can provide your team with a larger income while protecting the business should financial performance drop
Process Automation. Understand how Robotic Process Automation (RPA) can swap in for employees who are conducting daily manual transaction processes. Bots can work 24/7 and cost as low as $2,000/year. Invest in digital capabilities:
- Launch an RPA bot in your organization to lower the fear factor and demonstrate the value proposition to your functional leaders
- Think about how an enterprise Center of Excellence (COE) can eliminate duplicate manual work and increase your organization’s digital capabilities.
>> Read “Using Centers of Excellence to Change the Game”
Indirect Spend. Analyze your buckets of indirect spend across your entire business. Enhanced spend visibility and sourcing governance can drive 5-8% of indirect spend savings. Drive value through indirect spend optimization:
- Compile data and analyze buckets of spend to identify size of opportunity; increase manager attention on these areas and track spend savings
- Take it a step further to rationalize your supplier base, renegotiate terms and seek volume discounts with retained suppliers
3. Realign Your management Team
In stable market conditions it works well to develop a thoughtful strategic plan, cascade goals down to your management team and measure performance at year end. In uncertain times, this management style quickly goes out the window with everyone jumping into firefighting mode. Don’t leave to chance the ways to create value and the financial strength mentioned earlier.
An agile management style can help. With a focus on the items above, and other specific value creating levers in your organization, you can align your leadership team to the ‘why’ and allow them to make decisions to navigate the tumultuous economic conditions. Define measures of success, break down silos, and empower teams to quickly recognize when things are off and adjust accordingly.
Besides having your team laser focused on these three areas, this environment is shown to improve customer satisfaction and increase employee engagement. But you cannot make these changes in the middle of fighting a fire; it’s important to think about these now. The results will make you well-positioned when economic headwinds hit or keep you competitive in any market condition.
Please contact a member of your service team, or contact Jim Boland at firstname.lastname@example.org for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.