Parts of the global economy are still in recession. Europe’s economic turmoil threatens the recovery prospects of the U.S. economy. Even after surviving its own recession, the American economy is still weighed down by sequestration, looming new taxes including Obamacare and budget cuts.
Many businesses are still thinking about how they’re going to survive. Their principles are looking carefully at business plans that might not be factoring in any growth – or even decline.
This paper sets out the key factors to ensure your survival in an economic downturn and how you can prepare for that future.
4 Key Factors in Survival
Whether you make it through the downturn or not comes down to the survival instinct. Professional firms that want to survive will take control of the downturn. They will use it as an opportunity to improve the business because – in their hearts – they believe they are in control of everything that happens.
Those who do not survive are far more likely to feel out of control. The downturn -and everything it brings – happens to them and it is down to luck whether they survive or not.
Fortunately the survival instinct can be taught – to some degree. Central, in my opinion, are four key areas that will help your business survive.
Focus on Your Business
During a downturn things can get “interesting” in the boardroom. As revenues fall management can become a little preoccupied with “thinking out of the box” for ways of boosting income. New services are launched, new marketing campaigns started and money thrown after promotional schemes.
All of this is wasting money. While a few companies have made big money by diversifying during a downturn, the vast majority of survivors don’t. They focus on their core business, closing down non-core activities and reducing costs where there is no value back to that core.
During downturns the cost of buying a business often falls dramatically. It can be very tempting to invest in the mergers and acquisitions trail, but all of this takes money. First there is the purchase price – which has to be financed from funds that could be put to use elsewhere. Then there is the disruption to both firms as they are integrated.
It isn’t just M&A activity that can waste cash. Mass marketing campaigns, often poorly thought out and done “to keep the name out there” can be as wasteful. Better to focus on the clients and potential clients of the core business than try and reach everyone at once.
Assets can also become liabilities, and those that aren’t needed can be converted back in to cash. Nor is there any need to upgrade assets that are working perfectly well – so don’t plan on upgrading all your office computers unless you have to!
Finally there is the issue of cost reduction. If you are going to build a cash base to weather the storm ahead you need to be both sensible and fair about where costs are cut. That may mean letting some staff go, but don’t cut the headcount unless you have reduced the workload first. If your business needs 10 staff to run there should be 10 staff, not 7 trying to do the extra work. This leads to stress, which affects their performance and the perception clients have of you. Ultimately it can also lead to the death of the firm when the turnaround starts and staff “remember” the way you have treated them!
No professional service firm can survive without trusting relationships with its clients and staff. If these relationships break down – if your firm chases short-term revenues over longer-term survival – damage is going to be done that will not be easily undone. No matter how intense the pressure, a professional that can continue to act professionally stands a greater chance of emerging from the downturn with reputation and client base intact.
During the good times it is all too easy to ignore those who complain (staff and clients alike!). In a downturn it is even easier as dealing with their regular complaints saps important energy.
Yet these are the people who are telling you how to improve your chances of survival. They are the ones who are saying “this is getting in the way of you and I having a long-lasting relationship.” They are also the ones who are focused on their own business, and are going to do the damnedest to survive themselves.
True, there are those who complain in the hope of getting a price reduction or because they have little else to do. But those who provide constructive criticism are offering you free advice – and you would be advised to listen to it.
Open, Honest Communication.
During downturns paranoia can set in. Management become dedicated to keep everything secret, including from staff, which leads to frustration and feelings of hopelessness.
The most effective form of communication is that which is open. Staff need to be informed about what is happening – the downturn affects them as well. It also needs to be honest – no hiding of facts or communicating them in long, jargon filled ways that few people understand.
Communication has to happen often and in a personal way. If staff do not know what is going on they will create it for themselves – and thus are born rumors. Half truths and downright lies become accepted as fact and unless management are quick to dismiss them they will become truths in their own right. Left for too long and any attempts by management to dispel them will be met with cynicism.
There also has to be two way communication. Staff have to be able to tell you what their fears are, and how they would like to deal with the situation. Sometimes the results can be surprising. During a recession one firm found its staff were more willing to take pay cuts to protect jobs than have layoffs. They were dedicated to the company and believed it would turn round. Heaven and earth were moved, with the result the firm returned to profitability shortly after the downturn ended. Management said thank you by paying off every member of staff’s mortgage.
If Things Have Gone Wrong
Whether the company is facing a downturn because of general economic conditions or for reasons of management, there are some common steps that you can take to reverse the situation.
First and foremost, stop what you are doing. All projects, campaigns and other work have to end as quickly as possible in order to prevent the business from leaking any more cash. This is not to say that projects will not be restarted again, just that you need to give yourself a little breathing space while you work out what to do next.
This can be a brave step to take, particularly if you’re committed to contracts that have penalty clauses. However, the aim is not to worm your way out of contracts, but to be able to take a better understanding of how they impact the rest of your business and its worsening situation.
Take a sounding of what people think – clients, employees, investors alike. Ask people what they think is going wrong, how they feel about the way things are going and what they think could be done to get it back on track. Listening to people helps the process of restoring confidence in the business and its ability to get over whatever mountains have to be climbed.
You also need to gather hard data (typically management are either very good at this, and very bad at asking people for their opinions or vice-versa – both are needed!) Cash flows, client activity, general market trends can all help in the next stage….
Make some space for yourself and think about how you are going to reverse the decline. What is usually required is a clear strategy that focuses on the four points outlined above – focus, money, relationships and communication. However, any longer term objectives that you come up with have to be balanced against short-term tactics that make a small step on the journey, and vice versa (again). Without the objectives you are likely to wander from tactic to tactic and never reverse the decline. Without the tactics you’ll simply never do anything to meet your objectives!
You have the plan, you know what you need to do, now you need to do it. Your plan may have all the charts and diagrams a business needs, but if no one does anything with it, then so what? Action requires firm but sensitive leadership, mixed with a little negotiation. Remember to always act fairly and maintain two way open and honest communication.
Also remember that a plan can be changed to reflect changing circumstances. If something isn’t working, revisit it and decide whether to drop it or adapt it. There is no point in taking an aspirin if you’re headache is caused by you bashing your head against the wall – just stop hurting yourself!
After the Downturn is Over.
How do you know when the downturn is over? You can usually tell when the worst is over when you’ve had consistent growth (maybe not huge percentages, but certainly an increase) for the past 3 months. If you’ve grown for 5 out of the past 6 you can be pretty sure your business has stabilized.
What not to do.
As soon as that growth kicks in don’t rush out and start spending money. It might only be a blip, and in any event your cash reserves are likely to be down and in need of building up. Keeping a lid on spending now means you won’t create problems for yourself down the line if problems start again.
Nor should you stop doing whatever it was that kept you going. Again there is a danger that as the performance starts to pick up everybody relaxes and problems start to creep in. Keep a tight ship until you’re sure things are on the up.
How to Introduce a “Thank You.”
The staff will have worked hard and it is only reasonable for them to receive (but not expect) some form of thank you. After all, they are likely to have invested a lot of their personal time and energy in keeping your business afloat. It is only right – in the interests of staff morale and fairness – that they receive a direct return on that investment.
However, a common mistake that is made is to start handing out pay rises, which increases the cost base for the next downturn. It may be better to look at one-off ways of saying thanks as they don’t add lasting costs to the firm, and can be withheld if things suddenly go wrong.
Nor should you rush in with the gifts. Remember, a couple of months of growth isn’t stability and you may have a month or two of decline ahead. However, the staff are going to see the increases starting to come in and their expectations are going to lift a little.
I suggest starting small. After the monthly staff meeting you may consider buying lunch for everyone, investing just a small amount of any extra profit and keeping the rest for the war chest. Once things have settled down then you can consider the bigger “thanks”, such as a large bonus at Christmas (or paying their mortgages, as was mentioned above).
You should also be very clear about why the staff are getting a thank you. Don’t just leave it in the pay-packet – take some time and effort to talk to staff personally and thank them. That helps with morale and adds a more personal touch to what could otherwise be seen as just another management “trick.”
Keep Up The Good Work.
As time goes by and the downturn becomes a distant memory it is inevitable that inefficiencies and complacency creeps back in to the business. While management gurus and advisors would like to believe a firm can keep a constant eye on everything the reality is when the good times come we tend to slip back a little.
It doesn’t hurt to relax a little – few people have the stamina or energy to keep their businesses in a constant state of change. It gives people a chance to recharge their emotional batteries.
That doesn’t mean you should never revisit the business again. It doesn’t mean you shouldn’t keep an eye open for the signs of another downturn – whether in your business alone or the economy as a whole. It doesn’t mean that you shouldn’t stop focusing on your core business, managing your cash in a sensible manner, developing strong relationships and communicating in an open and honest way.
The Bottom Line
Whether there is a downturn in just your business or the economy as a whole it doesn’t mean disaster is inevitable. If you think about what you’re doing and make plans to succeed you stand a much better chance of surviving.
So focus on your core profession and find ways of supporting it. Invest your cash wisely. Listen to people. Be open and honest when you communicate. All these things will HELP to keep your business afloat when things get bad.
Original Publication Date: March 25, 2003
About the Author:
- Build on Your Core Competencies
- Managing for Bottom Line Cash Flow in Retail
- Recession-Proof Your Business: Small Business Survival Guide
- How to Manage Home Business Cash Flow Effectively
- How to Live Up to Your Greatest Potential