When Kreischer Miller’s Mario Vicari talks about how to approach business in challenging times, he uses an analogy of rocks beneath a boat in a river. The rocks — weaknesses in a business model — are always there beneath the surface, but they are not visible when the tide is high and business is good. But when the tide drops, these “rocks” are exposed and can do damage.
“When the external environment changes and business activity drops, it exposes the weaknesses in a company’s business model,” says Vicari. “What worked in the past, when things were going well, may not be the best strategy now. A recession is an opportune time to get back to basics and fundamentally evaluate and change your business for the better.”
Smart Business spoke with Vicari about how to adjust your business model to the new external environment.
What differentiates the businesses that survive a recession from those that fail?
The key is the point of view of the owners in how to look at your business in a recession. The best companies are looking for opportunities instead of focusing on the negatives. A business owner can either shudder in fear reading the daily headlines, or go on the offensive and look for opportunities to make changes to improve his or her business so it not only survives the downturn but comes out of the recession as a better company. When business is flush and sales growth is high, many businesses lose track of the fundamental things that they should be paying attention to. With top-line growth under pressure, companies have to focus on other areas of their business to improve profits and have to look for efficiencies to improve results because you cannot rely on external growth. Many great companies come out of recessions in a better position than when the downturn started because they use it as an excuse to make fixes to their business.
How should owners approach their business differently in lean times?
Businesses have to drastically change their planning assumptions and monitor their business more closely in a downturn. Historically, many companies use top-down planning — meaning that most of their budget drives off of what they expect with their sales growth assumptions. This is a dangerous way to plan right now. There are too many external factors beyond your control that can negatively affect a company’s top line. Companies must use a bottom-up approach and plan based on looking at their cost levels, head count and waste to determine which cost pools are necessary or discretionary and where they can be more efficient. After gaining clarity on costs, companies should engage in scenario planning so that they are prepared to take action if business levels decline. That simply means determining in advance the cost adjustments a company is prepared to make based on different revenue scenarios so that it can react quickly if sales levels change for the worst. This is a defensive strategy toward planning, but it is based on managing the things you have control over and not relying on things that you don’t — like sales growth.
How should companies address head count in a down economy?
One of the greatest opportunities that companies have to improve their business in a recession is to upgrade their people. With so many layoffs, the talent pool is strong and the employer has the bargaining power. Most companies have nonperforming employees that they know they need to address. Now is the time to address underperformers and replace them with stars. There are many displaced workers right now that are in that position through no fault of their own. Many of these people may have been high performers at their last job and are just victims of a tough economy. Finding and hiring these people is arguably the single biggest improvement that companies can make right now that will have a lasting positive effect on their business.
How can companies address reducing waste?
When I think of waste, I think of Parkinson’s Law. Parkinson’s Law is based on a theory of work researched and published by Professor Cyril Northcote Parkinson in 1955. This research was performed a long time ago but is universal and applies to all businesses today. The law states, ‘Work expands so as to fill the time available for its completion.’ It is human nature for people to make the amount of work they have to complete fit into the time that they have available to complete it. What it means in the real world is that most businesses can get the same amount of work done with the same level of quality with fewer people. Excess people and process waste are the biggest areas of waste in most companies, and addressing them can have an immediate impact on the bottom line.
What other external risks should companies pay attention to?
One of the heightened areas of risk that companies need to closely manage is the credit risk associated with their accounts receivable. I would estimate that the average company’s accounts receivable is subject to two to three times the normal level of credit risk right now. There are many companies in the U.S. that are struggling or in bankruptcy, and these events have a ripple effect throughout the economy because all of the troubled companies have vendors that are affected. Companies have to stay much closer to their cash right now because of this increased exposure. Companies should re-evaluate their credit and collection process and increase the level of resources and attention directed toward collecting receivables. No matter what, receivables are subject to credit risk, but now is a time to minimize that risk by having less money on the street.
Mario vicari is a Certified Public Accountant and Certified Valuation Analyst. He is a director with Kreischer Miller in Horsham, Pa. Reach him at (215) 441-4600 x144 or [email protected].
