How to storm-proof your business as dark clouds gather
Almost every day there is a major media headline about another corporate failure. It’s a rare manager who does not fear becoming one of those statistics.
As businesses come under more stress, many owners increasingly focus on the day to day operations of their business and attempt to deal with everything themselves.
This usually leads to the creation of a “black hole”, which continually sucks the energy from key management and causes them to focus increasingly on operational issues and spot fires. It can also cause erratic behaviour of the owner as they try to grapple with the issues.
What this means is that the bigger issues can get missed, drawing the business into a tailspin of despair both financially and emotionally.
Businesses of all sizes can suffer from these same issues.
So what can an owner or management team do about it?
Eleven steps management can take to storm-proof their business:
1. Assess business sensitivity
Can customers easily defer purchasing your product or service? Is it an essential item or a nice to have? Essential items are less prone to significant fluctuations. Can you change your product mix to be less sensitive?
2. Assess vulnerability and opportunities
If your business has been reliant on borrowings for the majority of its growth then it is more vulnerable to operational fluctuations. For example, many property development failures have been caused by highly leveraged borrowings coupled with a fall in values. Can you proactively reduce your gearing before you are forced to?
3. Keep your strategic focus
Understand your market, customers and products. Keep your strategic focus but have a clear set of assessment criteria and milestones upon which to assess the performance of the strategy. A word of warning: I have seen many instances where a “pet project” of an owner or management, usually non-core, has been pursued to the detriment of the entire organisation.
4. Minimise vulnerability
In addition to having sufficient reserves, do you have a proper risk management strategy? This covers things such as your corporate governance processes, compliance with legislation, disaster recovery plan and supply chain management, and reliance on one key supplier or one major customer. How flexible is your workforce?
5. Match structure and systems to maximise performance
Do your reporting systems allow you to see the timely outcomes of any changes you make to your business? How can you structure your business strategy so services are delivered in the most efficient manner?
6. Manage cash better
There is a saying “Cash is King”. How you manage your working capital is key to your survival. Do you pay your suppliers in 7 days but collect in 30 days from your customers? Remember you are funding the difference! Are you carrying excess stock?
Do you have dedicated collection staff to improve your collections? I had a client the other day say they could not afford a collections staff member. When we did the debtors days outstanding calculation, the staff member had only to bring them back by 2 days to pay their salary.
7. Cut costs
Often this is the first reaction to a change in the market. But are you cutting costs in the right areas? This might be a good time for an independent party to assist so that your alignment with your strategy is maintained.
8. Defer the right expenditure
Prioritise your expenditure – particularly your discretionary spend.
Develop business cases for significant expenditure setting out matters such as: Why are we spending the money? What are other alternatives or options? Timing? Cost/benefit analysis? How long will it take to pay for itself?
9. Switch from fixed to variable costs
Can you move away from fixed costs to more variable costs to enable better matching with revenues?
10. Prune low performers
Just about all businesses have them and are aware of them but can be blinded by the “we have always done it this way” syndrome. Make sure you have the right reporting systems to determine the low performers. Talk to staff, as they can have some good ideas to improve efficiencies.
11. Realise under-utilised assets
Do you have a large capital investment in machinery that may not be fully utilised? Holding equipment for the full year to be only utilised for a portion of the year may not be best practice: in some cases it may be more economical to free up the cash and to employ sub contractors or rent the asset to meet peak demand periods. Understanding the utilisation of your business’ assets is a basis for determining whether or not there are cheaper alternatives.
Storm-proofing is about being aware of the key levers in your business and pulling those levers to make you less vulnerable. Forecasting capability and reporting systems that enable you to receive timely feedback on the impact of each of the levers is essential if you are to get the balance right.
Ian Hall was a Principal Advisor with Vantage Performance – anaward-winningg, national business transformation and turnaround firm with proven success in solving complex financial, operational and people performance issues.