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Business Consulting

2002-08-01 10:47:00

Business is off 50%... what now?

QUESTION:  Five years ago, I became the third generation owner of our well-established family business.  This last year has just been horrendous.  Our business has been off 50%, the bank is getting anxious and I'm not sure what to think.  Please suggest where and how to start?  Our company has never faced a situation like this.

ANSWER:  First of all, assume that the next twelve months WILL be the SAME as today.  Take note:  managing in tough times is much different from good times.  Be prepared to stretch your thinking and be challenged in many ways. DON'T expect sales to increase and wipe away your challenges.  Your challenge as a small company will be to survive the downturn while still making money.Start by getting a handle on your short-term future by utilizing these steps:1. Develop an eight-week cash flow projection that identifies your expected cash revenues (NOTE: actual revenues, NOT sales) and your necessary cash expenditures.  Divide the cash expenditures into three categories:  "A" items that must be paid to keep the doors open (rent, utilities, critical vendors, etc.); "B" items necessary to serve most customers but could be delayed; and "C" items which are those expenses that could be cut if necessary.  Review and update your cash flow projections on a weekly basis (keeping them eight weeks out).  Managing your cash flow is obviously critical.  These projections will be very helpful for timing difficult expense cuts. 2. Review your most recent monthly financial statements. (IT'S CRITICAL THAT YOU RECEIVE CURRENT STATEMENTS!).  Identify what we call  fundamental performance indicators (i.e. gross margin, inventory turns, profitability).  Determine the trends or "red flags" of these indicators (i.e. Are margins declining? Are accounts receivables growing?).  Determine your "break-even" if sales continue at current levels, increase 5% or decrease 5%.3. Identify the costs that must be cut.   Probably, you cannot make significant cuts without eliminating  positions.  a. Let key employees know that they are staying and that you need their help.  b. Lay out a plan and work it diligently.  c. Categorize your cuts:  First cut those items that won't significantly affect customer service or employee morale.  If forced to, then make cuts that will not affect your ability to serve key customers, but will likely affects employee morale and increases the demands on key personnel.  If these cuts still don't get things turned around, then consider what we call survival mode cuts.  4. Meet weekly with your key managers and review:· Sales activities· Cash flow projections· Expenses, inventory levels, and accounts receivables· Critical issues and progress on action plans to address them (i.e. expense reductions, new customer contacts, etc.)· Activities and expected results for the next weekMake sure you involve or update other owners, your key managers, and your banker.  We recommend you develop a well thought out and realistic financial plan that you can present to your banker.  Keep him or her aware of the actions you are taking to restore profitability.  After addressing the painful but critical issues to restore a profitable business, we suggest you engage in a business planning effort with your management team.  Tough times should challenge your managers to identify new markets, products, or other opportunities to get your business back on a growth track.  We predict your business will not "go back to what it used to be."  Rather, your future success will depend on these three things:  1. a prompt response to the current business climate2. making clear headed, difficult decisions to position you for survival and3. the involvement of your managers in a team-planning process to take advantage of the market changes.  Although managing through this difficult period will be perhaps one of the greatest challenges in your business career, history tells us that good leaders will seize the day and be back on top when the business cycle turns up.