By Andrea Hill
The phrase back to basics implies having strayed from them, which happens with businesses over time. When cash and credit are flowing freely it is possible to neglect some basic disciplines and still turn a profit. Recessionary environments are unforgiving, however, and a return to basics is essential to cope with low demand, restricted cash, and ultimately, low morale.
Management is the skilled handling of a system and comprises four activities: planning, organizing, leading, and controlling. Business scholars refer to these as the pillars of management. You should aspire to excellence in all of them at all times to maximize profit. And by honing those skills, you’ll also have the mastery to rapidly and skillfully meet the challenges of difficult times. Let’s review how the pillars apply in an economic downturn.
Inventory management and demand forecasting are tough on a good day. Add low cash and credit availability and spiky demand, and you lose a lot of sleep. Businesses succeed and fail on the strength of inventory management, so weakness is never acceptable. If you rely on a short-term line of credit to buy inventory, you have the additional stress of wondering when the bank will pull the plug.
Best practices for managing inventory begin with analyzing sales patterns, charting seasonality, and converting sales models to inventory models. In most cases, the Pareto Principle applies: 20 percent of your products account for 80 percent of your sales. That means roughly 20 percent of your product inventory will turn rapidly; the balance will include items that turn very slowly. When cash and credit are available that can be fine, but in tight times slow-moving goods must be converted to cash.
For an independent retailer with repair and custom services, this can be challenging. Consider finished goods and repair/raw materials inventories separately. If cash is too tight to buy more of the items customers want, and other finished goods languish on your shelves, it’s time to sell the latter products at or near cost to access cash. Painful? Yes—and inadvisable during better times. But your planning efforts right now should include a review of acceptable margins. Look at every slow-moving item as a ball and chain.
Raw materials are a different challenge. Analyze how much you have and review how much custom and repair work you did in the past two years. If you have more raw materials than you’ll use in a year, consider selling them. Better yet, get your vendors to take them back. Don’t be afraid to ask for inventory cycling support.
Your other inventory planning challenge is anticipating how much you’ll need and when you’ll need it. This is particularly true if you use a short-term line of credit. In normal times, you’d aim for a forecast with 95-97 percent accuracy. But now, with cash low and customers flaky, you also need forecasts based on two “what-if ” scenarios: What if sales are 5 percent higher or 15 percent lower? You don’t want to be out of saleable items when a motivated customer appears, nor do you want to over-buy and restrict cash. The what-if scenarios will spotlight the risks and rewards you face. If working with a banker, review the scenarios together. It will bolster the bank’s confidence in you.
Decisions about overhead—which usually means payroll—are among the most challenging and painful in a recession. Poorly run companies often start by making lists of weak employees. That’s a mistake, because fearful managers look at everyone but the absolute stars as “C” players. Success requires supporting players, too, and companies need to be staffed for the future, not just the present. When the market picks up, customers won’t wait for you to rebuild—and most managers realize they’re short of staff or skills only when customers start complaining, which is too late.
If you run a small manufacturing company (perhaps 15-20 employees), you probably have downtime now. You could lay off employees, or you could choose one of the many options for cutting payroll costs without cutting staff. They include a four-day work week, a mid-winter shutdown without pay, pay-raise rollbacks, and flextime for employees who work fewer hours. You may gain the most by permitting people who move to part-time work to keep their benefits. The immediate savings on wages can be significant, and the staff you’ll need when orders pick up will be readily available.
This may be a good time for a company to improve as well as preserve its workforce. Before the slowdown, a small casting shop that assigned workers to tasks based on skills struggled constantly with finishing backlogs. In December the company used some of the options above to reduce hours and utilized remaining downtime to cross-train and upgrade skills. When the economy improves the staff will be better prepared to meet demand.
Most small business owners leave ratios and charts to the accounting staff. Why? Because they usually are entrepreneurs, and an entrepreneur’s strength typically is in knowing how to produce or sell something, rather than financial analysis. But numbers tell a story, and if you rely on others to tell it, you get their interpretations, too. Those views are important, but you must be able to read the story for yourself. This is advice for all times.
In a recession, the first order of every manager’s day must be to read the company’s financial story. Here are a few critical measurements:
Cash flow. Don’t run your business based on the cash register. Even a one-person operation must have a three-month cash flow plan that anticipates how much cash will come in, how much will go out, and when. During a recession, analyze the plan daily, comparing the previous week’s actual performance to the projected performance, and use that insight to project whether the following week will be according to plan.
Margins. Do you have a margin target? If not, set one, because what gets measured gets done. If you already have a target, have you revised it to enable you to unload slow-moving merchandise? Review margins daily. If too high, you may unnecessarily restrict sales. If they are too low and your sales are lower than anticipated, you are probably giving money away unnecessarily.
Budget. Review costs weekly and your budget monthly and compare projections to actual performance. Look for opportunities to reduce costs without gutting future performance. This is not the same as worrying about costs at night. These careful reviews, in the morning when you are fresh and looking at organized reports, will yield ideas about how to cut costs creatively.
Sales reports. In difficult economies consumers change their buying patterns unpredictably. Review sales reports daily. Analyze weekly what is selling now com- pared to the same time last year. If you discover a sales opportunity early—and have the cash to respond—you may be able to act quickly enough to exploit it.
Fill rates. Your fill rate is the measure of how completely you fulfill orders. If you had 100 orders due to ship yesterday and filled 97, you had a 97 percent fill rate. It is never good to keep customers waiting, but in a downturned market, failure could also deprive you of the cash you need to survive. Monitor fill rates and quickly identify any areas that must be improved to meet demand on time.
Very little needs to be said about leadership here except this: Communicate constantly, clearly, positively, and with the understanding that if you convey fear, your employees will be fearful, too. You need every mind and heart engaged in protecting the business, and your mood, behavior, and actions will set an example. Do the things that engage minds and hearts. Share information about the condition of the business—both positive and negative—in a straightforward manner. Post critical measurements, update them daily or weekly, and teach employees what they mean.
Most important, plan for the future, communicate the plan, and begin the work necessary to achieve it. If all energy is directed to survival, the motivation to excel will disappear. Working together for a brighter future is an energy booster. Leadership ultimately is shining a light on the path forward for others.
The four pillars of management are simply disciplines. Mastery requires practice. The practice of these business disciplines will help you survive a downturn while preparing you for better days.
First published in Feb. 2009 MJSA Journal