Wednesday, January 21, 2009

Managing your Business During and Economic Downturn - Part 2


This is the second part in our series entitled Managing your Business During and Economic Downturn. Although it is a fairly lengthy post, we are sure that you will find the information useful and particularly relevant in these tough economic times. The photo above is from Suraj via Flickr.com

What happens to businesses that find themselves in the middle of an economic downturn where they have not earlier formulated a strategic plan? Most managers will hesitate to take strategic steps knowing that there is no second chance to correct errors. A common strategy is to cut prices but this only leads to a drop in profits and consequent cash management difficulties leading to further losses.

Managers should rather look to removing inefficiencies that may have become apparent during the downturn. Restructuring should be done to take advantage of the economic upturn when it comes. This may include trimming fixed overheads e.g. by staff reductions, subcontracting or outsourcing, closure of branches and general organisational restructuring.

Experience has shown however that staff reduction should be done with caution. While this may lead to an immediate improvement the long term effects may be that the loss of key staff members essential to take advantage of the eventual upswing.

Managers should try to focus on core operations and get rid of non-essential profit eating ancillary enterprises.

Some further recommendations

  • Try to lock yourself into long term contracts with your existing customers by giving them incentives such as discounts.
  • When times are good businesses tend to become lazy about collecting debts owed to them. This can become dangerous during a downturn so tighten up your collection procedures. Set targets to reduce the average collection period and try to improve on this. Being tough with customers is not pleasant but it is essential for survival during hard times. Remember to use every opportunity to obtain security for debt. Any liquidator will tell you that the proprietor of an insolvent business almost always sees to it that creditors for whom personal suretyships have been provided usually get paid prior to actual insolvency.
  • Take a good hard look at capital expenditure and if it is absolutely necessary to purchase plant or equipment consider acquiring distressed assets from auctions. In this vein money spent on a technical expert to assess the condition of the item before buying it is money well spent.
  • It is not a good idea to take additional loans during difficult times but if it is absolutely necessary then be completely honest with your bank about your business's financial position. Remember that banks too may be feeling jittery about the current downturn. Strengthen your relationship with your bankers.
  • Try to reduce rented space thus reducing fixed costs by subleasing a portion of your premises. If you anticipate that your business will need more space when the upturn comes try to negotiate an option to lease more space at a later date.

This is worth repeating:
Economic downturns are cyclical as are boom times.

Bruce Lyle
Membership Services Manager

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