5 steps for managing your company during turbulent economic times

The effects of the current turmoil in the global financial system will be felt for years to come.
RSM McGladrey
2009/04/13
Initially the fallout affected primarily companies in the mortgage and financial services industries, but it is now touching the lives of virtually every tax-paying American citizen.
While the current credit crunch has its roots in the subprime mortgage crisis, it has extended far beyond traditional lending institutions, spreading its tentacles to financial firms like Lehman Brothers and Bear Stearns as well as insurance companies such as American International Group. Whether and to what extent the various government interventions attempted will ameliorate the crisis remains to be seen.
These tough economic times require that you have a solid understanding of your company’s positing within the bigger economic picture. Not all industries are affected equally by a recession. The cyclical volatility of differing sectors varies widely. In general, durable goods industries are affected more greatly than nondurable goods. But even within those sectors, results vary. Understanding your industry’s position within this picture is vital.
Understanding your industry’s volatility is only the beginning. You also have to determine how best to manage your business. The following are some key strategies to consider:
Step 1. Analyze your entire operation. Take a serious look weekly, even daily, at the demand and the costs. This more detailed look at your cash flow, income statement and balance sheet will enable to stay one step ahead of your operations and will prepare you for what issues need your immediate attention.
Some company owners have a tendency to think they can grow their way out of debt. Management will forecast an increase in sales or new product launches as a turnaround strategy. It is, however, almost unheard of for a company to grow its way out of problems. Product launches or other growth strategies generally require significant upfront investment, with projected revenue increases lagging behind. For a company already experiencing liquidity issues, such strategies will exacerbate, not help, their problems.
Step 2. Determine if there are sufficient resources to achieve forecasts, taking into account unexpected surprises. If there is an inability to fund operations or if there are projected deficits, look at making changes to stabilize the company. Look for the core business and jettison non-core assets or lines of business.
The restructuring specialist may also have to break through a logjam of denial. The company may have never had liquidity issues, and management may not understand how serious a liquidity crisis can be to the company’s operations. Management may also be blinded by a feeling that it can resolve the situation by itself without seeking outside assistance. In either case, whether management is driven by arrogance or by denial, a company will need operational restructuring to get back on its feet.
Step 3. Look at credit terms. Which creditors have been overextended? Figure out a process to deal with them. Rank payments to determine the necessary cash outflow. Stick to reasonable credit terms and monitor them properly.
Step 4. Develop a plan to deal with customers and suppliers. Assure your customers, if you’re able to, of your ability to continue to supply them with goods. Look at contracts with your suppliers. Which are sole-source suppliers? If they fail, they can disrupt the balance of your supply chain. Develop a plan to procure the goods necessary to meet
your needs and continue the flow of liquidity.
Step 5. Communicate with your stakeholders--your lenders, customers, vendors, suppliers, employees and board of directors. This may involve meetings and phone calls, as well as written communications regarding the company’s status. Inform your stakeholders that you’re embarking on a restructuring process and share the timetable. Allow them to understand the situation, your needs, and your course of action.
Clearly your employees are among your key stakeholders. You need to develop a process that not only informs them of the status of the company but also empowers them to help implement a restructuring plan. Although it is not always feasible to communicate all the details of the restructuring to your employees, it is important to keep your key people informed and communicate to them what their new roles will be.
No matter which strategies are appropriate, it is vital to plan and act aggressively to anticipate and address issues before they get out of hand. As you look at your budgets and projections, stress test them severely. What happens if sales that you anticipate to be flat are actually off by 10 percent? By 20 percent? Having a plan in place in advance to deal with each eventuality will enable you to react in real time to your circumstances in an environment where the ability to move quickly is vital.