Mark Kippenberger: What to do when business is in a downward cycle

Opinion

When economic conditions start to slow, often the first thing owners turn their attention to is right sizing their most visible monthly cost - labour resource. But while roles should be reviewed and consolidation made when possible, head counts should not be fixed at the exclusion of everything else.

Some business owners will look at cutting labour without looking into other areas of their business operations. It often takes just a month to see the direct effect on your costs after laying off staff but implementing this in isolation is not a solution in itself. It is unlikely that the cost of labour is the sole reason your business is suffering.

Look at other areas of business operations including procurement and distributions, ie how product is reaching the market. Raw materials are usually the greatest investment made by a business so it makes sense that this is the best place to start looking when reducing costs. Identify where efficiencies can be made with your suppliers and procurement practices because many suppliers are willing to cut their own prices to either secure new or retain existing
business.

Overhead management and cost efficiency are one of those important components which indicate the degree of control flowing through the business. Robust authorisation parameters should be prepared and implemented so that staff can follow procedure. Set your people up to succeed and get out of their way. It is also important for a business to protect market share. When advising a client, we often start by asking who their key clients are, what clients
might be at risk and how can we generate more business from the customers already being served.

More importantly, marketing strategies which focus on short sales now take priority over the more long term marketing strategy of brand building. You need to seriously consider whether you can afford to put money into building your long term profile if it is going to be at the expense of your cashflow.

The credit crunch means many businesses can no longer easily borrow from banks so it is important to focus on building cash flow now instead of next year. Cashflow is critical when a credit crunch preempts a recession and because a manager often has debt collection lumped in with other duties it means it tends to be last on the list of priorities.

So while new customers are critical, it is essential to review current customer debt profiles to ensure invoices are paid on time.

It is also important to clearly define the role in handling debtors so debt collection is not left until last. Operating cycles and debtor processes should be examined to ensure tight control around debt collection.

Lending institutions do not like to lend funds to a business with no idea where and how their cash is derived. Working capital management is paramount in this climate. If you are suffering from rising debtor days, then review your administration processes around debt collection.

In addition, new acquisitions or further investment into capital assets should be examined carefully. The failure to assess opportunities based on robust and consistent criteria can seriously undermine the quality of the decision process behind the investment. The days of borrowing money to follow a hunch are gone.

It is also important that your people understand what your strategic goals and annual objectives are. Moreover, are they aligned with those goals? If they are not, now is the time to lift communication so everyone understands the end game. The last ten years of economic growth has set businesses up to take stock and plan for growth when the cycle turns again to boom. When business was busy, you may have found that you reacted to whatever came your
way. Now is the time to grow the part of the business that fully realises your dream and to redefine your role to make the most of your skills and passion.

The alternative is to hunker down and wait out the storm. But a do nothing approach can come at huge cost to a your business if competitors are using the recession window to deliver long standing benefits to their business - benefits that will long outlast any boom / bust cycle.

REVIEWING THINGS

* Top tips for reviewing your business in a downward cycle
* Do not look at labour costs in isolation - review all business processes at the same time.
* Identify where cost efficiencies can be made, particularly with your suppliers.
* Closely monitor margins - identify how much of the downturn you as a business owner are willing to absorb financially.
* Implement robust authorisation parameters to ensure due process is followed by staff.
* Ensure marketing strategies that build short-term sales take priority over long term brand building.
* Review your customer debt profiles to ensure invoices are paid on time.
* New acquisitions or asset investments should pass a solid set of criteria.
* Redefine your role to make the most of your skills and passion.
* "Do something" - your competitors will be using the "recession window" to enhance their businesses.
* Set your people up to succeed and get out of their way.

* Mark Kippenberger is a partner with KPMG.