Growing and Surviving in Difficult Economic Times

Growing and Surviving in Difficult Economic Times

Some small and medium size companies will be able to capitalise on opportunities during these uncertain economic times, gain market share from competitors, and otherwise grow and expand. Other companies will have to quickly determine plans for survival. Whatever the course of action or opportunity, now is the time for serious review and decision-making.

In performing a business analysis of their operations, owners and managers should focus separately on the three principal operating areas of their company - costs, sales and working capital.

It is easy to have a ‘knee jerk’ reaction in difficult times and indiscriminately cut costs. It is, however, much better to examine your operations and understand their costs and benefits. What are the causes of certain expense levels and what are the effects of doing with or without a reduced level of costs?

In examining your company's costs, it may be enlightening to compare its current cost structure (in terms of dollars by cost category, number of people by department or activity and space needs) with the related cost structure of two to five years ago. What has changed? Have increased investments in people and facilities yielded proportional increases in sales and profitability?

If you seek to reduce costs, consider the following:

• is the current level of transportation costs justified?

• are the current levels of travel and entertainment necessary to maintain and grow the business?

• what’s the effectiveness of your advertising and sales promotion efforts? Do these efforts need to be more focused?

• what are your operating hours? What is the profitability of the second shift or your company’s extended operating hours? Can staffing of extended hour shifts be more flexible? Is it more cost-efficient to use overtime for existing employees rather than to hire additional people? Can temporary help be used more effectively?

• what is the effectiveness of your purchasing function? Does your company aggressively shop the market? Do you get competitive bids? Have you pressed suppliers for the best terms?

• which employees are critical to operations and which are not? What jobs and functions can be combined or eliminated?

• what space and facilities can be done without? Consider sub-leasing or selling excess space and equipment.

To ensure your success and even survival, you need to take a hard look at your operations and understand the costs and benefits of current expenditures.

To examine the sales side of your business, you need to consider the following:

know each customer's profitability. What level of profit do you really make on a customer after you account for all costs - chargebacks, returns and allowances, overtime pay, etc. No amount of sales volume can make up for a negative gross margin. You need timely and accurate information to make these important judgements;

what is true for customer profitability is also true for product profitability. Do you need all of those products or services in your line? Does each of the products and services contribute to profits on a fully loaded cost basis? Do not forget to factor in inventory carrying costs, which can be as much as 20% to 25% of the product's carrying costs on an annual basis;

what is the efficiency of your manufacturing or service delivery? How do you measure productivity? Should you use units produced, sales per employee, sales per square foot, percent of billable time productivity, or some other measure? You need a measure of productivity that you must then plan and track;

do you continually and carefully compare your operations to your competitors? What are they doing that you are not?

is quality inspected for or engineered into your product? Look at your levels of rework, scrap and customer return. For service businesses, how do you measure quality service? How do you obtain feedback from your customers? What is your company's reputation?

You need to speed the flow of capital through the pipeline. The faster the flow, the greater the profitability. The smaller the investment in working capital to carry the same sales level, the less financing needed dollar for dollar.

The ability of the company to manage and control its investments in receivables and inventories, while at the same time achieving the longest reasonable terms on its payables is critical to success and perhaps survival.

Consider the following ideas to better manage working capital:

You need timely, accurate and current information;

Managing receivables requires information and a tight process of follow-up on delinquent :accounts. The older the receivable, the less likely you are to ever collect it;

Inventory needs to be managed on an item-by-item basis. What are the day's sales in inventory on each item? Is your inventory out-of balance, overstocked in slow-moving, low gross profit items and out-of stock in high volume, high gross profit items? Consider low or no investment in certain slow moving, low gross profit items.

In view of high carrying costs and inventory obsolescence factors, consider moving or closing out selected inventory items to generate immediate cash and cost savings;

Look at your order processing cycle. For every day that you shorten the cycle, you improve customer service and speed up the flow of working capital and profitability;

How long does it take between the receipt of the order and the shipment or service performance? Are orders backlogged around your shop? Why does it take so long to process an order?

When the item is shipped or the service performed, how long does it take to get the bill out?

When the customer makes payment, how long does it take to get the payment deposited, and when can you use the cash? Be certain to count bank clearing days; and

Finally, review your accounts payable procedures. How does your company negotiate vendors terms and when to pay suppliers? Who manages this process? Are your people open and honest with your suppliers while at the same time paying on the longest terms possible without penalties, loss of credit or premium prices?

The most available source of additional financing for many companies may be the dollars that can be freed from their own working capital. The investments here are substantial. Tap your own capital and make it work double-time.

No matter how big or small your business is, you need a written operating plan.

From the plan, you will be able to identify your break-even points, operating margins and receivable, inventory and payable balances.

Some companies need to develop life boat plans as a contingency for their survival in difficult economic times. A life boat plan assumes several operating scenarios.

When the expected level of sales is not achieved, what management actions will you take next? What costs will you cut? What activities are terminated to maintain positive cash flow and assure survival?

Now is the time to make these decisions, not when you are faced with financial deterioration.