Managers, now more than ever, need to focus on what really matters to their business success. We’re all facing a version of the classic “Good News/Bad News’ scenario at this time. The bad news is that the current business environment is presenting, or will be presenting, business managers with some challenges. The good news is that most everyone is in the same boat, and managers can actually create competitive advantages for their organizations through the way they address these temporary economic bumps in the road.

FOCUS ON THE WHAT MATTERS
Managers who will succeed and prosper in this market will be focusing on a few key areas in their businesses:

• Long-term direction and strategy
• Personnel
• Equipment and facilities
• Operations
• Finances

LONG-TERM DIRECTION AND STRATEGY
You need to have a clear long-term strategy and direction for your business. This creates the context for all the rest of your business decisions. Without a strong sense of direction, everything can look like an opportunity for you to pursue or a threat to avoid. This is especially true if you feel you are facing some difficult times in the marketplace. Without a good idea of what you’re trying to do in the long run, every cost cutting idea in the short run can appear to be an opportunity for you, whether it actually is or not.

A good strategy identifies what you will pursue, but more importantly, it also identifies what you won’t do. Some entrepreneurs are prone to taking on anything and everything in their pursuit of a larger top line. The more successful managers we’ve worked with have a tighter focus. They understand what they are good at, where they can make money and where they can pursue a niche that allows them to earn better-than-average margins.

Having said all that, now might be a good time to re-think your overall strategy and direction. Is it still valid? What do you need to change? Given the economic roller coaster you’re looking at, are there benefits in making some changes in strategy? Or is that the last thing you should be doing right now? Note that we’re not talking here about throwing out your overall focus and strategy and starting over from scratch. We’re asking if there are some adjustments you need to make in the strategy to address the tough times it appears we will see for a while. You’ll see why all of this is so important as you read on.

Potential Strategic Pitfalls
As you’re reviewing your strategy in light of current conditions, pay special attention to the following areas:

Infrastructure. Do you have adequate control processes in place? Will they support the future you envision? If not, what will it take to ramp them up? The old adage, that “it takes money to make money” really applies here. Managers must invest in infrastructure to support planned growth. There are no shortcuts. Inadequate support systems and processes add additional, unnecessary risk to your business. Many times this area receives little attention and in slower markets, it receives undue negative attention. Infrastructure is your friend—don’t make cuts here when times tighten up.

Radical Changes in Business Service and Product Offerings. We knew the owner of a restaurant chain who had developed a very good business in his market area. He decided to sell frozen versions of the entrees that had made his restaurants so successful. The only problem was that this was an entirely different type of business, with different regulatory issues, different production and quality concerns, and a whole new distribution channel. And no one in his organization had the requisite background to really pull it off successfully. Needless to say the new venture no longer exists. When managers stretch the limits of what their firms are good at, when they push beyond the basic competencies of their organization and people, they can get lucky and do all right, or they can have some real problems. As Dirty Harry Callahan asked, “Do you feel lucky? Well do you?”

Geographic Expansion
Expanding extreme distances from a firm’s present area of operations of presents another set of problems. Without robust systems for communicating, tracking and sharing information, even simple tasks associated with basic management and controls become more difficult. Not knowing what the customers are like to work with in the new area puts the business at a potential disadvantage. In addition, determining who are appropriate, trustworthy suppliers in distant locations can be a problem. Of course, not having an understanding of the labor market is a disadvantage as well. And who will run the far flung operations for you, in accordance with your methods and culture? Without sophisticated means of dealing with this type of expansion, smaller businesses in particular will increase their business risk substantially. On the other hand, when local markets head for the tank, you may need to look at more distant markets to stay busy. This can be very tricky, though, without adequate infrastructure and reporting to allow you to manage the business properly.

Reducing Margins
During good times, we can “let the good times roll” and generate a bottom line profit at ordinary margins. As conditions tighten up and slow down, it’s not uncommon to see margins decrease. At what point are the margins so miserable that you can’t afford to take on the work? Well, look at your cost structure to determine what your actual profit or loss on new revenues might be. You can’t just make it up on volume if the volume is at a net negative margin. While new sales may cover the direct costs, what about indirect costs and general and administrative costs? What additional, nonproductive costs will you incur to bring on the additional sales, and will the margins from the new sales cover these costs? Of course, cash flow management becomes critical in slower times. It’s critical that you stay on top of receivables and inventories now. What are you doing to speed up collections and increase turnovers? What more can be done?

PERSONNEL MANAGEMENT
This is perhaps the biggest, most important part of your business. People get the work, people perform the operations, creating and providing products or services, and people keep track of it all. Without the right people and the right skill sets in your people, it doesn’t matter how good your technology is or how good or bad the economy is. Many managers avoid or skimp on the costs of people development even in good times. This is one area where you can’t afford to cut corners, especially given the labor shortages we’ve faced recently. Of course, when you’re busy, it’s hard to find time to train people properly. Then, when times are slow, no one wants to spend money on much of anything and training and development often get the short end of the stick.

Cutting Costs
In really difficult times however, training and development may be the least of your worries. You may need to look at any one or a combination of the following tactics to help optimize costs at your company:

• Cut some positions
• Change some positions from full-time to part-time positions
• Cut the work week (and pay) from 40 hours to something less
• Cut back on company vehicles or vehicle allowances
• Tighten up controls on fuel allowances, travel and entertainment
• Reduce discretionary expenditures on company parties, wearables and the like

All of the above assume that you are actively and effectively managing performance through a process of setting expectations for each person and then monitoring performance and holding people accountable (this includes the need for coaching and counseling as well to get people up to speed when necessary). If you are not, you ought to consider beefing this up now—the time is right for it.

Getting Rid of Dead Weight
And while we’re talking about performance management, what about the dead weight that your organization may have accumulated over the years? Many family-owned businesses and other small to midsize businesses seem to accumulate some dead weight personnel over time. You all know who I’m talking about. They’re your version of “Wally,” the do-nothing character from the Dilbert comic strip who just drinks coffee and prides himself in being able to do nothing and get away with it. Your “Wallys” may not be as recalcitrant as the fictitious version, but they’re still dead weight. Now is the time to deal with them. Either set some expectations and hold them to the expectations or counsel them out of your organization. In addition to that lack of performance that you may not have documented properly over the years, you now have an externally generated reason to make a change.

Keeping Your High Impact Players
When we encounter tough times, we need to re-recruit our key people—those employees who are critical to the future of the organization. This is where personnel management ties in to strategic management. Without an adequate long-term view of things, it can be difficult to keep some of the best and brightest stars. They want to know what the future holds for them at your organization. Part of being able to address this concern involves having an idea of what your unique, ideal image of the future is for your organization so you can explain how they fit into it.

You need to be able to reassure them that your company is viable and that you have a plan to work through the current crisis and that they are part of the plan. You can’t just assume that they will figure this out on their own. Even if you don’t have a clear path from here to the future, you need to talk with them and tell them that, and that you are working on it. You then need to keep them updated as you work out the plan and see any changes in ongoing conditions or in your plan. You can never over-communicate in times like these.

EQUIPMENT MANAGEMENT
If your business is equipment-intensive, it can have millions of dollars tied up in property, plant and equipment. This is a significant investment that must be managed aggressively as well, particularly in slower economic times. Now is the time to take another look at your capital budget. A capital budget that looks at equipment requirements based on the volume of work you expect to perform. It should consider how much of your equipment needs will be met through renting, leasing and purchasing, and you should be looking at what kind of return you expect to generate on your investment in the equipment. On the flip side of the coin, what equipment pieces are you renting or leasing that you can turn back in and thereby cut your costs on? What pieces do you have that might be sold to raise some capital? (We recognize that, as markets turn down, the spiral effect causes everyone to ask this question, and ultimately, the value of the equipment takes a dive, but you need to see what all of your options are, even if you choose not to exercise any of them). You already should be monitoring the life cycle cost of major equipment on a piece-bypiece basis. What revenue has each piece generated, and what costs have been incurred to generate that revenue? Should some pieces be sold or traded based on this analysis alone, not to mention current market conditions? Have ongoing repairs and maintenance caused a piece to become the alligator that can’t get enough to eat? Is it better to outsource more repairs and maintenance or to take more on in house? It’s time for some analysis and projections to get a sense of what this looks like in either case.

OPERATIONAL PLANNING AND MANAGEMENT
In addition to actively looking at ways to find work and get projects into your backlog, you also need to really focus on aggressively planning and managing operations for profitability. This is even more important now than before. We all can benefit from standardized templates, processes and procedures that our people can follow to perform the work successfully.

Shortcuts in planning, managing and monitoring operations can only result in more unpleasant surprises when you are trying to operate in difficult market conditions. Similarly, the less experience your people have in operations, the more rigorously you need to plan and monitor your operations. This is as true for service businesses as it is for retail, wholesale or contracting businesses. One of our clients says that his success is the result of “taking the thinking out of the work for the people doing it.” This may sound extreme, but what he’s saying is that he’s standardizing his procedures so he can be sure that quality work is done right the first time, and in doing so, he’s using the standardized processes to develop his people through on-the-job training as the work is being done. And it works. His business has continued to grow and his margins outstrip the industry margins on the work he does. This will benefit him in the slower market as well.

Your supervisors and line managers need accurate, real-time information about how they are doing. Many times we’ve seen managers who can’t tell us accurately how a particular part of their operations is doing on a weekly basis. Often the accounting system is blamed. In some cases, the information just isn’t being tracked closely. Your supervisory people should know where they stand on a daily basis with respect to their budgets. If they don’t, how can they make changes that may be needed to get back on track? How can they help you manage your business through tough times?

FINANCIAL MANAGEMENT
Bankers and investors look to businesses for certain information periodically in the form of interim financial statements. In the current economic conditions, banks and bankers are getting more nervous, wanting more information, and not making as many promises about working with their customers. In fact, in some cases, they’ve gone back on previous promises to the dismay of the customer. You need to be able show your banker that you do have a plan and that it makes sense. Not only that, but you need to be able to show them that you know what’s going on in your business—your systems are adequate to allow you to manage through the tough times.

We find that many businesses do have systems in place that allow them to provide consistently timely and accurate information for outside users as well as inside users of the financial statements. That’s an important hurdle. If your accounting department is not keeping up with this responsibility, it’s time to find out why. It could be that the systems and procedures aggregated over the years have a lot of wasted time and effort in them. It could be that your support people need more training and skills, or it could be that your system needs to be beefed up. In any event, if you can’t measure it, you can’t manage it. In good times, you can be sloppy and still make a ton of money. In slower times, you need to be much more precise.

And what about your annual operating budget? Have you updated it yet? Have you looked at your cost structure and what you can do to cut costs without cutting too close to the jugular vein of the business? When we talk about cost structure, we’re referring to understanding the behavior of your costs under different levels of volume. Which of your costs are variable and drop off when volume drops off? Which are fixed and seem to go on no matter what happens to volume? Can you find a way to minimize some of your costs, whether fixed or variable? Now is the time to start with a fresh sheet of paper and re-examine your assumptions as to what costs you can’t live without or can’t cut. (We didn’t say this was going to be easy).

We find many managers of smaller businesses who do not even work from a budget. The argument often is that, “we can’t predict the revenue easily, so what good does the budget do?” All the more reason to have a budget, to set some goals as to volume of sales, targeted margins and expected costs to support the sales. On the other hand, we work with some businesses that have a detailed, three-to five-year business plan outlining their expected revenue and costs at a pretty high level of detail. In any event, you need a budget—now more than ever. It creates a level of focus and intensity that keeps everyone on the same page and minimizes drama about what they should do and how they should do it.

While we talking about financial management and bankers, what kinds of conversations have you had with your banker over the last several months? Have you been keeping them in the loop and actively discussing financing options, what you’re doing to revise your budgets and operating plans, as well as alternate financing plans? This is not the time to be avoiding bankers and other lenders. Get engaged so you can work things out together as best as possible.

THE BOTTOM LINE
Economic conditions may be difficult for a while. But you can deal with them. If you haven’t already started, now is the time to begin. If you have, consider some of the suggestions raised here to help you with this process. The future belongs to those who plan for it and then execute effectively to achieve the plans, recognizing that when you plan, you can only expect to have to change your plans because it’s a dynamic business environment. That means that the processes and suggestions we’ve made here need to be employed continuously so you can be prepared for continued changes whether they’re “good” or “bad.”

Dom Cingoranelli, CPA, CMC is Executive Vice-President, Consulting Services, and a cofounder of the Succession Institute LLC. He assists managers with, growth, strategy and performance issues.

dom@successioninstitute.com
www.successioninstitute.com

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