Counter-Punching a Downturn

How a Business Manager responds to a sudden downturn in trading conditions is critical to how the business will come out of that cycle.

Downturns occur in all businesses and industries and not just because the economy generally is turning. It can be triggered by the loss of a major contract, client or customer; an unexpected interruption in your supply chain; market conditions in a particular sector you focus on; loss of a key employee or the defection of a key team to a competitor; or a myriad of other possibilities.

The sudden downturn is characterised by an immediate reduction in new revenue generating activity. Depending on the nature of your business this may reflect in actual current revenue immediately or not for a period of time - it all depends on the lead-time nature of your business or industry. It is absolutely critical that you understand this characteristic and are able to recognise and detect the change.

Unless you're monitoring and measuring the those key revenue generating activities you may well not realise that a sudden downturn is around the corner and you're about to slam into a brick wall! Current revenue will continue to flow based on sales made, orders received, current contracts being worked through or medium/long term assignments being worked out. But if your pipeline is empty or running at half strength then that downturn is coming fast and if you're focussed on the work you've got to do today you may well not realise that you've got much less work to do tomorrow.

So knowing what your leading indicators are and monitoring and measuring them regularly is critical to business health.

So the downturn has hit (for whatever reason), revenue has slumped, profitability is impacted and cash-flow will follow it down. What do you do? In the immortal words of Douglas Adams' Hitchhikers Guide to the Galaxy - DON'T PANIC! What you do next will not only affect how you fare in this downturn but how well you come out of it. The best businesses do better in downturns and come out of them stronger and better positioned than their competitors and frequently stronger and better positioned than themselves prior to the downturn.

Your first task is to understand what has happened - this may be obvious or it may not be.

Once you're clear on the underlying reason for the change in your business climate then, and only then, should you consider what action to take. Is it a transient event or is the ground moving beneath you? How long will it take to work its way through? Is it impacting your competitors? What about your customers or clients? These are all questions requiring consideration - they will give you direction for the steps you take next.

There are only two sides to the profitability and cashflow equation for SME's - the money that comes in and the money that goes out. There is a very real and absolute limit to steps you can take to reduce the money going out - zero! By that I mean you can only reduce costs and expenditure to the extent that the business is able to continue to operate. If you cut so deeply that you damage the fabric of the business then you'll likely have nothing with which to come out of the downturn with.

That said, shutdown is a viable strategy and there are some smart people in, for example, retail business today who are running there business as a managed shutdown because they can't see a future - for them the ground has shifted and for whatever reason they've decided they can't shift with it.

Back to cost cutting. This has two benefits:

1. It reduces your costs and supports cashflow; and
2. It conveys a message to your team.

The second benefit may well be just as important as the first. It's critical that you've framed the cost cutting correctly - tell your team what has happened and what you're going to do about it. If you're going to cut hours or overtime or staff or salaries or bonus', i.e. anything that will directly affect them, do it right away, tell them why and reassure them as to the future. In relation to other costs, they convey a message that the situation is serious, action is required and you're doing what's necessary. Get them on board - they can help you.

Identifying the costs to cut is never simple but try this process:

1. List all of your expenses and outgoings and place 3 columns alongside them headed Compliance, Capacity and Convenience.
2. Any cost which impacts on your ability to stay in business is a Compliance cost - put a tick in that column alongside it. For example, rent. In the short-term you can't change it and without it you're not in business.
3. Any cost which directly supports your ability to produce, provide and sell your goods or services is a Capacity cost - put a tick in that column.
4. Everything else falls into the Convenience column and these are your first targets. You can cut them aggressively - better to cut harshly and then add back than not to cut enough.

Time to turn your attention to the money that comes in - for SME's this will be revenue. Unlike expenditure there is no limit to your ability to grow this and you should focus on it with laser-like intensity. There are only 4 ways to grow a business and 3 of the 4 relate to revenue.

One golden and absolute rule you need to follow here - you've got to protect your margins at all cost! If you're impacted by a downturn the last thing you need to do is damage your business fabric by discounting prices. There are smarter ways to provide customers with buying incentives and they will relate to benefits for increasing their business with you.

Another maxim to remember here - it costs substantially more to attract a new customer or client than it does to increase your trade with an existing customer or client. It's also less risky - you already know whether your existing customers are good credit risks, you've got a relationship established, you can talk to them about mutual benefits. So exhaust opportunities to increase trade with your established customer base first.

No business-person wakes up in the morning wishing for a sharp downturn to hit thinking "that will be a great opportunity to tune up my business!" - but that is the silver lining to the downturn cloud. So when it hits follow these simple rules:

• Don't panic!
• Analyse what has happened to get direction
• Then move decisively to take action
• Categorise your expenditures, identify your targets and cut quickly and severely
• Then focus on your revenue aggressively - existing customers first

You'll emerge a better, smarter, leaner, stronger and more profitable business.