There is no better time than now to
perform a wellness checkup of your
business — take the pulse, determine your organization’s strengths and
weaknesses and determine what
processes, products, people and other
factors could inhibit your success in the
coming year. Companies that fine-tune
operations and focus on their core competencies will weather the economic
storm.
“If you are investing in areas of your
business where there are opportunities,
your company will do well now and on
the other side of this economic downturn
when some of the competition will not be
there,” says Barry H. Worth, member,
turnaround services, Brown Smith
Wallace LLC. “The survivors will have
stronger processes, products and more
cohesive management teams.”
A vast market correction like the one
we are experiencing now is a golden
opportunity for businesses to get an edge
on the competition, to develop and refine
internal processes, improve products and
services, and strengthen their balance
sheets.
Smart Business discussed how to conduct an internal checkup and why the
economic downturn presents opportunities for proactive companies at a round
table with Worth; Bill Willbrand, member,
tax and accounting; Robin Bell, member,
tax and accounting; and Ted Flom, member, risk services.
How can a market correction actually help
strengthen a business?
We don’t want to discount the tough
road ahead. But, these times present
opportunities for companies to become
better managed and positioned now and
for the future. Over the years, many companies have become complacent, growing the business without looking at internal processes. A downturn like this forces
a ‘clean piece of paper’ approach to management, enabling companies to identify
strengths and weaknesses and start fresh.
A market correction forces businesses to
reassess and recommit to goals and
accept change.
What mistakes do companies tend to make
during tough economic times?
Many companies err by not spending
the necessary time or resources to identify and address underlying business
problems. During tough times, these
issues often become worse and can ultimately present a big risk to companies.
Businesses today need increased attention and commitment. Managers must
step up to understand problems, reassess
risks and identify solutions immediately,
before they get out of hand. The biggest
mistake is ignoring operational inefficiencies and taking a ‘wait and see’
approach in a challenging economy.
Another key mistake is immediate cost
cutting without proper analysis. Many
businesses trim marketing or human
resources first. But without marketing, a
business is not positioned to gain market
share and build its prospect list. When the
economy rebounds, the company should
be positioned to move full force, ahead of
the competition. Assuming that the
organization is lean, eliminating even
more people will discourage the existing
work force and could compel valuable
employees — workers you want to keep
— to look elsewhere for jobs. Be very
careful when trimming these costs.
Instead, evaluate your customer base
and product lines. Evaluate profit margins
to ensure your pricing is adequate and all
products are profitable. Are there customers that cost more to keep than they
return to your bottom line? Are there
product lines that should be discontinued? Review outstanding accounts receivables and determine whether a customer
is too risky for you to continue serving.
Recognize that uncollected accounts
receivable is money you are loaning out to
customers for free. And the older the
invoice, the less likely a customer is to
pay. Don’t forget about effectively managing inventory levels. Every dollar of inventory is a dollar that could be invested elsewhere to help revitalize your business.
What are some of the early signs of a troubled company?
If your company is experiencing these
‘symptoms,’ stop and take a close look at
your operations. Signs of trouble include:
tightening cash flow, increasing and
longer aging of receivables, building
inventories, dwindling credit lines, declining debt/equity ratio, decreasing profit
margins, diminishing sales and missed
sales forecasts, lost clients and market
share, increasing overhead costs, and
declining quick and current ratios.
What strategies will position a business for
success when the market improves down the
road?
If you only focus on survival, you will
most likely miss opportunities to capitalize on the upswing. This is a time when
companies need to critically analyze their
operations and put together a plan to
position themselves to manage risks and
capitalize on opportunities. A strong balance sheet can help a company capitalize
on opportunities.
After identifying risks, areas for
improvement and opportunities, call a
meeting with managers and key operating
employees to discuss findings and form a
task force of individuals who are committed and will implement the plan. This task
force should include management and
key operating employees as well as trusted advisers, e.g., bankers and CPAs.
Your plan should address cash flow.
Prepare a forecast at least 90 days out
and keep it rolling one quarter ahead.
Analyze assets that can be converted to
cash, such as accounts receivables, dead
or slow-moving inventory, and nonproducing property and equipment. Analyze
debt and, if needed, contact key creditors
to begin working out extended payment
schedules and terms for current purchases. Keep lines of credit. This is challenging in today’s banking environment, but
take steps to preserve your lending relationship and share this plan with your
banker. Finally, determine whether your
company will need to access new capital
to work the plan. Will you need a partner
to get you through this period? Some
options may include bringing on an individual investor (active or passive), venture capitalist, private equity group or
bank SBIC.
How should businesses preserve and nurture relationships with lenders?
Keep lenders informed about the health
of your business and share your operating plan with them. Identify the weak
spots in your organization that you will
improve, share with lenders what critical
success factors will drive your business
forward in this economy, and explain to
them where cash flow opportunities
exist. Ultimately, lenders want to know
that the lines of credit they extend will be
paid back. Assure them that your company is capable of doing so by involving
them in the development of your plan.
Bankers can be valuable advisers.
What planning is critical as businesses
close out 2008 and prepare for the challenges that lie ahead?
First and foremost, businesses need to
perform a thorough self-assessment —
look at your strengths, weaknesses,
opportunities and threats using a tool
such as our ‘Business Health Checkup.’
Using this assessment, management can
establish goals and a plan to move the
company forward and position it for the
future. Management must be brutally
honest in this exercise. Bringing in an
outside adviser can help bring objectivity
as well as expertise to this effort. Putting
together an effective plan will be the
foundation of your company’s long-term
success.
What items should managers address as
part of a business health checkup?
Critically evaluate how the downturn
impacts your business. Look for risks and
opportunities, review strategic priorities
and reassess your commitment to them.
Some of the steps we recommend are to:
- Assess revenue streams for risks and
opportunities. What happens to revenue
if you change nothing? Where can margins be improved? What products/services should be discontinued? Which customer relationships should be reassessed? What opportunities would add
market share through marketing, geographic expansion, etc.? What opportunities will arise due to situations with competitors (cheap acquisition, bad customer
service, etc.)? - Evaluate debt and capital structure.
- Analyze the quality of your assets.
- Assess working capital structure and
identify ways to improve ratios. - Examine relationships with customers, manage receivables, and exit
unprofitable customer relationships. - Analyze cost structure and determine
where there are opportunities to tighten
expenditures; consider the implications
of budget reductions. - Look for opportunities to renegotiate
contracts to more favorable terms. - Examine and strengthen budgeting,
planning and forecasting practices. - Consider tax planning opportunities
and implications. - Evaluate the effectiveness and efficiency of existing processes.
- Identify the company’s critical success factors, and put in place tools to
measure whether those are being
achieved. - Understand critical business risks,
and put in place contingency plans when
appropriate (e.g., what if you lose your
largest customer or product sales drop
dramatically?). - Evaluate your team to determine if
everyone can contribute to the success of
the company. Consider whether there
may be opportunities to attract top talent
to your organization.
What’s next, and how long will this economic downturn last?
If only we had a crystal ball. The fact of
the matter is businesses should not concentrate on when the economy will
rebound. They should concentrate on
fine-tuning operations and doing what’s
best for their business now. Certainly, we
are in uncharted waters, and we are going
through some times now that economists
with decades of experience have never
seen. We cannot predict when the economy will rebound, but it’s safe to say that
we have a long road ahead of us.
With that in mind, businesses must
focus on the long term. Relying on
reports that the economy will improve by
the fourth quarter or second quarter or
several months from now causes some
businesses to ‘wait and see’ and not give
their organizations the attention needed
to weather the economic storm. Do not
put planning on hold in hopes of good
times ahead. Certainly, the economy will
make a comeback. Companies that prepare for that during challenging times will
come out of this time stronger, leaner and
positioned for success. Seek help from
the outside for financial, planning and
analytical expertise — and gain an objective opinion while assessing operations
and data. Most of all, don’t wait to start
this process. Now is the time to take
action so you can fully embrace current
and future opportunities.
BARRY H. WORTH is a member at Brown Smith Wallace LLC. Reach him at (314) 983-1202 or [email protected]. BILL
WILLBRAND is a member at Brown Smith Wallace LLC. Reach him at (636) 754-0200 or [email protected]. ROBIN BELL is a member at Brown Smith Wallace LLC. Reach her at (314) 983-1217 or [email protected]. TED FLOM is a member at Brown Smith Wallace
LLC. Reach him at (314) 983-1294 or [email protected].
