by Steve Scott, CEO – Technology Acquisition Group
There is no doubt in anyone’s mind that the American economy has turned. Your company may be severely affected or only slightly affected by the economy, however, all companies now must adjust for an environment of difficult credit, worried employees, nervous shareholders, unreliable suppliers and reduced revenues.
We’ve had a very long run of improving economy, expanding business and easy credit. Many CEOs in today’s companies are not aware of the changes required to operate company when the economy is shrinking. Personally, I’ve been through a couple cycles and have had the opportunity to turn around several companies. Operating a company in hard times has many parallels to a turnaround in normal times. Let’s examine a couple of critical steps you can start quickly, as CEO, to assure survival and even a thriving future.
Keep stakeholders informed.
Shareholders, employees, even customers need lots of information. When times are tough, different constituents will be need more information from you regularly. A few will need to understand the plan, while others need to know that someone is in charge and thinking about everything that can be done to keep their jobs secure, to keep the revenue flowing, or to keep the share value high.
Keep cash in use, but safe.
When the economy is having such severe retraction, as we are currently undergoing, it is truly irresponsible for a CEO to conduct business as usual with cash management. Cash may be king for consumers, but for a company, it is the true lifeblood of everyday operation. The usual business of having one bank holding the majority of your cash is not a safe position any longer. It is much smarter to place your cash among several different banks, as well as other types of secure institutions to guaranteed liquidity when you need it.
Certainly, you will take advantage of any insurance guarantees on your deposit, however, spreading among multiple banks is safer for very large deposits. Too many banks have failed to trust just one. By the way, there are rumors that some banks have lost FDIC insurance. You might want to watch this.
Your credit lines are in danger.
Keep talking to your banker. It might help keep your lines open longer if discretion is ever used to decide whose credit lines are cut. It might also give you a heads-up on any actions that might indicate your bank is about to tighten or reduce existing credit lines.
Find more credit lines. The traditional banks have tighten credit to the point that they may not be the other able to offer credit extensions. However, private investors and some investment houses still have funds available for revolvers and convertible debentures to fund operations. These sources of capital are probably more expensive than the short-term credit markets, but they’re far less expensive than running out of cash when it’s time to meet payroll.
Public companies.
Publicly held companies have a few extra requirements under hard economic conditions. After you have dealt with all of the usual regulatory, governance and transparency issues, it is time to review the special planning needs created by a shrinking economy. In other words, plan for hard times. Have backup plans. Have a list of who you will talk to when you need to get cash or inventory fast. Look seriously at your use of resources and your inventory levels. The board should examine what happens if inventory is suddenly not available because that will stop revenue collection dead in the track.
Shareholders become nervous when they do not understand what is going on with their company. A wise CEO will communicate more often than normal to the shareholders when times are tough. Talk honestly about the issues, this is absolutely the worse time to try and hide issues. When everyone knows that your trying hard to keep the value in the company it frequently helps stabilize the stock price.
This might be a good time to institute a regular press release, or even a web conference for your shareholders.
Receivables watchdog.
Kick in a new level of watching of cash flow on a daily basis. This is the only way you can predict, with reliability, your short term cash needs. You probably still won’t be able to collect any better by watching the receivables, but you will be its setting expectations with your customers which improves your chances to be paid before companies not as clear in their expectations. Dashboard reports are particularly helpful in this area.
Right Sized Inventory.
Inventory is a two edge sword. Your cash is tight, and so it is very difficult to keep your assets in non-liquid inventory. However, if your inventory is secure and adequate, you won’t need credit to purchase more inventory. Prior to collecting revenue, customer orders may slow because of their own slowdown or credit issues, even though they must order more of your product.
Expense reduction.
If you believe your business will be severely affected by the economic downturn, it is your responsibility to look at reducing expenses for the expected duration. If you cannot raise money or increase revenue, you’ll have to reduce the outgo. A few areas to consider are temporary work stoppage, layoff of non-critical non-producing personnel, reducing inventory levels, reducing travel, certainly reducing exotic salaries, in other words, cut the fat. Keep what produces.
First look, are you in an industry that will suffer?
Not all regions of the country, nor all industries will experience the downturn to the same severity. Some regions have a large military economy, or there may be based on technology or science, which has long-term funding and relies less credit markets. Your company may have a very large cash position from having just realized a round of public or venture capital funding. This is your time to go fast. Make smart hiring decisions. Perhaps you can even produce new products to be ahead of the competition. If you have a war chest, look at picking up the assets of struggling competitors. Regardless of whether you’re industry or your region is suffering deep or just sympathetic effects, it still behooves you to follow the strict cash management procedures discussed above.
Recession proofing your business.
Recession is not only a negative for a company. This is a chance to improve your operations with core business improvements that will make you stronger now, and set you up for dominance in your marketplace when the economy improves.
One of the smartest ways to recession proof your company is to increase your contacts with your customers. When business is booming and customers are easy to find, it’s very easy to neglect the core communications and regular follow-up with clients and potential clients. If you lose a client there is always someone waiting to buy. But that’s no longer the case under recession conditions. Focus on your top customers, give them lots of attention. You’re wise to develop regular, automated systems for communication and follow-up with your customers. These automated systems will now, and in the future, produce results at costs far less than the individual sales approach. When your sales staff do have individual contact with customers, your customers will already be predisposed to do business with you.
If you need a model to understand how this works look at any of the direct marketing companies that have successful catalogs. They consistently, relentlessly keep their message on your desk. So when you are ready to purchase, who else would you think of but your friends who have constantly kept their names in the forefront. The same will work for your company. Every business, every industry, sees this benefit.
Identify the segments in your target client base that are the last to feel the effects of the recession.
Double your communications, and customer support for these folks. These are the customers that will continue to spend now and well into the future. Because you have developed a relationship with them when so many of their other suppliers don’t, they will move their business to you now and stay when the competition returns.
Want a one sentence summary? Attend to your core business.
Steve Scott is a CEO-for-Hire and CEO Confidential Advisor based in California. After 25 years improving bottom line performance as senior management (several times CEO), six acquisitions, several turnarounds and raising a few hundred million he know what he speaks about. Get Steve’s insight on critical issues for CEOs and board members at blog.ceocomplete.com. Connect to Steve at linkedin.com/in/stvscott.