Establishing a twelve month budget/business planand a business continuity plan are still the best ways to prepare a business for the most probable known threats. But what can you do for unanticipated shocks that negatively affect your ability to achieve your profit goals? When companies are faced with unanticipated situations, that threaten their business, and they realize these disruptions are not short-term issues, they may need to employ “business disruption survival techniques.”
Examples of situations that few saw coming include – The sudden drop in the per barrel price of oil, i.e. NYMEX closing price $99.75 (6/30/2014) vs. $52.78 (02/13/2015), negatively impacting oil and gas companies, and the businesses that support them. Union disagreements and work stoppages at US ports along the West Coast, negatively impacting the inventory of many businesses that sell imported goods. This situation is believed to be resolved, after nine months. The climb in the value of the dollar against most currencies, resulting in exports becoming more expensive, while imports become cheaper.
In reacting to these shocks, businesses implement three main types of cuts, for the sake of temporary relief, i.e. expense personnel, expense non-personnel and investments. If not done correctly, these approaches may do more long-term harm, than good. Activities are as follows –
Slash budgets (Personnel Expenses) – As personnel expenses are the largest cost associated with every business, targeting this expense is usually the first move. This tactic includes implementing hiring freezes and job eliminations.
Additional approaches include salary freezes; bonus reductions; and reducing or eliminating the company investment in the employee, i.e. usually related to education subsidies. More often than not these approaches will leave you with a large exodus from among the high performing dis-satisfied employees that can move to your competitors.
A popular technique which I believe is a big mistake is to provide a stay bonus to a select few. The message relayed with this last strategy, “If you did not receive a bonus, you are not considered critical to the organization.”
Slash budgets (Non-Personnel Expenses) – In the short-run, fixed expenses cannot be slashed, i.e. rent, insurance… The target of this tactic is usually variable expenses, i.e. marketing. But during this time of a disruption, marketing is very important to bring in new sources of revenues.
Delay Investments (Revenues) – To preserve cash during tough times, companies may place a hold on investments until the difficulties pass. But why would you wish to delay the opportunity for revenues, associated with a new product or service?
To avoid the slash and burn mentality, establish an environment of constant review and analysis. Do not wait until you are forced to make a large correction. Make small adjustments to your business, continually along the way. Suggested areas to monitor include –
Review Client Arrangements – Obtaining a customer that becomes unprofitable is a common situation. It only becomes an error of management if you do not constantly review the situation to understand the returns.
Review Products or Services – Periodically every business should review its product lines and services, to understand the profitability generated. The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities.
Review Accounts Receivables – If you extend credit to your customers, which is required for almost all businesses, a certain amount of bad debt will result. At a certain point, you will need to ask for what you are owed. Resolving this bad debt efficiently and quickly, while not disrupting the possibility of future business from the customer takes tact and experience.
Understand Variable Expenses – Review your needs – Contracts represent your needs at a point in time, i.e. when they were executed. It makes sense that a contract will include items you no longer need – understand needs; understand pricing alternatives; seek opportunities to bundle; and avoid the warranty trap with new technology.
Consider Business Management Practices – The solution to counter an underperforming small or medium-sized business is a redesign. Interestingly, the method to redesign a business is the implementation of standard business management “best practices.”
Continue to Review Investment Opportunities – A company should only allocate cash to the most profitable uses, with the highest return on investment, which will provide potential distributable benefits to its investors, within the shortest amount of time.
Survival will be based on your ability to shift quickly, but strategically.
You can never plan for external disruptions, but you can prepare. Do the analysis today.© Copyright 2015 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!