Insights

Managing Your Business Through A Downturn


The recent tightening of the credit markets has created a short term loss of confidence in the global markets. Companies have been inclined to ask how exposed is their business and should they be concerned with the long term impact of the current market situation.

As negative influences to the market usually have a trickle down effect the real impact to businesses in all sectors will be felt in the months ahead. Through actively understanding key warning signs and actioning strategies to sustain business performance, companies have an opportunity to improve their financial positions, market share and future prospects.

Although the following register of key warning signs is not exhaustive, it will assist companies to determine future strategies and mitigate risk going forward. There are many reasons which may cause a business to decline both internally and externally.

Internal factors are the ones management can control. The main internal factors include – high leverage on the balance sheets, loss of key staff, no clear succession plan, uncontrolled operating costs and narrow product offerings.

High leverage on the balance sheet – a company which is highly geared is exposed to tightened lending and higher interest rates on borrowings. In a low product margin environment or cashflow crisis the knock on effect can be severe.

Loss of key staff – the departure of a knowledge based staff member who understands the organisation and effectively communicates to superiors and reports has a destabilising effect on operations and can lead to the exit of other staff.

No clear succession plan – as the baby boomer generation ages the need for a planned leadership transfer can leave many organisations without a strong chief executive if the current head departs prematurely.

Uncontrolled operating costs – The erosion of margins, ineffective systems for tracking spending, and a lack of accountability will not only stifle a company’s growth but may also trigger a collapse if coupled with other negative factors.

Narrow product offerings – The erosion of a business’s primary market has the potential to seriously impact the company.

External factors are the ones which management cannot control. External factors include changes to economic conditions, competitors, government policy, social trends, and technology.

Economic Conditions – negative economic conditions – inflation, decreased demand for products and/or services, interest rate movements, currency fluctuations and credit pressure amongst others – can rapidly affect a business and exacerbate weaknesses in the organisation. All too often being prepared for a downturn is low on the priorities of management teams; however putting systems in place to enable identification of issues early can be effective to withstand a downturn.

Competitors – all companies need to keep an eye on their competitors – the emergence of low cost producers, foreign player in the market, merger of rivals, a competitor introducing a new product range, new company with an innovative business model entering the market – failure to do so will undoubtedly lead to loss of market share and potentially put the business at risk.

Government Policy – whilst taxation, workplace relations, pollution control, product safety and consumer protection amongst other factors undoubtedly impact on businesses they will rarely, if ever, cause a well managed business to fail.

Social trends – although ever changing, a reasonably well managed company will be able to keep abreast of relevant social trends including changes in lifestyle, employee expectations, composition and attitude changes of a population to ensure that they can react as the changes become apparent.

Technology – the rapid changes in technology over the past twenty or so years has led to advances in materials, processes, techniques and has impacted nearly every company’s business model. In a period of rapid change management need to keep abreast of advances in technology specifically cost, disruption to operations, user awareness and understanding, utilisation, and training to ensure that they are implementing best practice.

In our experience most causes of business failure are the result of management’s continued reaction to unfavourable internal or external factors. Good management has the ability to identify the key warning signs or engage a specialist firm to conduct a strategic review of the business and implement effective strategies to positively realign the company’s performance.

More often than not strong management teams recognise when their business is in decline before it becomes a long-term issue. They can accept there is a need for effective solutions which rapidly improve the performance of their business and take the necessary steps to resolve the issue.

If you would like to discuss this topic in more detail please contact us for a confidential discussion.

Michael Fingland
Executive Director

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