Taking appropriate action can get you through downturns

BY RICH SCHMITT
Management specialist

I was talking to a wholesaler acquaintance at a recent meeting and he was bemoaning the fact that his business was off significantly over the past several months. He attributes some of the problem to goofy weather but he was noticing the general slowdown that people have been predicting. His people are seeing several characteristics of a slowdown:  a significant decrease in residential type business, contractors are grumpier as their business falls off, customers seem more price sensitive, and even their good customers are paying more slowly. 

 

The wholesaler also complained about his expense base as his company had “staffed up” to handle the boom times that they experienced just a year ago. They had also started some expensive upgrades to their facilities, equipment and fleets. With sales going south and expenses at an all-time high, he also expressed some concern about what the future holds for his company. He knows that he must take action -- but is unsure of exactly what, when and how to do it.

Economic cycles suck. Just as we start to enjoy the boom-times we get smacked in the face with a downturn. And for most of us, the down cycles are always more difficult to handle. We have all enjoyed the euphoric times where each month brings record sales and decent net profits. Some in our industry have marveled at their good fortune while others have become intoxicated with their own greatness.  It’s time to sober up and to get refocused on sound lean business practices.

From previous columns, you know that I am a fan of checklists.  My pilot training taught me that a checklist prepared from experience and in a calm, thoughtful atmosphere almost always trumps a checklist that is concocted during the panic that is part of many emergency events. Even commercial pilots -- who are very experienced and highly competent -- rely on a set of checklists for many of the normal and emergency situations they might experience. So why not have a checklist for business events like downturns in the economy. Such a checklist ensures that we handle the critical tasks immediately, and then serves as a reminder of the other actions that must be taken right after the urgent activities are complete. This fast action and comprehensive approach will allow you to come through this downturn in the best possible shape.

So here’s my checklist of things to do and to consider during economic downturns:

• Act quickly -- In flying, they say that the runway behind you is of no value. In business, time-passed is of no value because it represents things that should or could have been done. The longer you wait to act, the deeper the cuts will have to be or the harsher your actions will have to be. In some instances, acting now will also give you choices in the matter, where waiting may cause changes to be imposed on you and your business by outside forces.
• Focus on profits -- Also in flying, the number one task is to keep the plane flying upright and level. In business, the focus is on staying profitable -- even if you are not headed toward your eventual destination (strategic direction) or gaining altitude (growing). So the first focus is to take action to get the business profitable even if the profits are minimal. Profitable businesses have time to thoughtfully develop a revised direction.
• Assess your market’s situation -- Some areas of the country are being, or will be, impacted by the economy more than others. I am not an economist so you should not presume that I am making market predictions. You should develop your own market forecast to be used in planning your response to your situation. Don’t let good or bad forecasts on a national basis keep you from looking at your market and planning for your specific situation.
• Assess your company’s situation -- If you are one of the companies that didn’t do well during the most recent upturn, you should consider your situation to be critical. Your ability to survive this downturn must be a serious concern and your actions must be absolutely focused on staying afloat. If you lost money on an operating basis, consider your situation like an injury that is spurting blood. You are probably looking at a turnaround plan with urgent drastic actions not minor adjustments.
• If you are not in an actual turnaround situation, act like you are -- The mindset that companies adopt during a turnaround is actually quite healthy for those businesses. Turnaround companies stop doing business --unhealthy things -- and start doing business --healthy things. They get rid of fat, they get back in touch with their stakeholders, they get reinvigorated about the business and they actually feel better about the business than they do during the crazy, semi-out-of-control days during a boom. Your employees will appreciate that you are proactively getting the business under tight control so you won’t have to take drastic actions later.
• Pull out your budgets, review them and revise now -- Most companies go through the budgeting process at the end of the year, the budgets get approved, they get loaded into the computer and then the company goes on expense-autopilot. Most budgets are probably at least three months old by now and the outlook for 2007 is much clearer than is was when those budgets were prepared. In fact, the outlook is probably gloomier than it was four months ago. Your main task is to determine whether the underlying assumptions used to create the budget have changed and then to respond to the revised situation immediately. The worst mistake companies make is spending to budget while they are not selling to budget. If the sales are adjusted down, then the expenses must also be reduced.
• Pull out your receivables aging and get to work collecting what you are owed --  In collections, the squeaky wheel often gets paid so you have to spend time squeaking. You should also take time to estimate how much of an a/r hit you are going to take because you are going to take an a/r hit. The only question is, how big? Some of you will be thinking that you have proper reserves for your situation based upon your collection history. Make sure the history that you are using is from a downturn -- not your collection statistics from a boom period. I am concerned that we are going to see collection problems like we have not seen in many years. Even with the tougher bankruptcy laws, some your customers are going under. Others will have to string you out for a long time -- but getting them on a program to pay is better than nothing. 
• Explicitly decide who you are going to cut off or put on cod -- With your a/r estimates in hand, you can better plan your expense budget for the coming months.
• Forecast your cash needs -- With the a/r and sales forecasts, you should now be able to plan your cash flows and cash needs. Any changes needed in your borrowing should be discussed with your banker as bankers don’t like surprises.
• Do the right things even if they are unpleasant -- In my experience, delays just make the necessary changes more drastic and more unpleasant. If you need to cut two people from your business, delaying the process might mean that you need to cut four people in six months to get the same effect. Just like surgeons in a triage situation, you must focus on the spurting blood first.
• Don’t start out your plan with the thought that losing money is acceptable -- The top performing wholesalers make money. They make money in bad times and make lots of money in the good times. Realistically, some of you will have to focus on losing less money -- but it should not be considered an acceptable long-term situation.
• When you need to make changes, don’t pretend that it is business as usual -- The environment is not the same as last year and the sooner you and your team act upon the revised view of the world, the better.
• Communicate, communicate, communicate and communicate -- Be involved and up-front with your team, with your customers, with your suppliers and with your banker. Owners and senior managers need to get out of their offices to lead the charge. This is not a time to stay in the bunker. Get out and remind your customers that you appreciate their business and that you want to earn more of their business. 
• Take time to assess the market with you own eyes -- Tough times are not navigated with second-hand information. Out in the field you can assess your competition and your customers. If you see that all of a contractor’s trucks are sitting at the shop, you might be seeing the iceberg just before a disaster.  When you see that the contractor who owes you a ton just bought himself a one-ton truck, you might be in for a ride -- but not in his truck.
• Owners and managers need to step up and step it up -- The management team sets a powerful example in how they operate. If your team doesn’t see a sincere commitment and greater intensity, they are unlikely to respond to your planned changes with anything beyond lip-service.
• Challenge your people to step up and step it up -- When you are done with this process, there will probably be fewer people working harder. You have to ask your people to commit and get on board with this process. When you find individuals who cannot or will not help, you must seriously consider whether they have a future with your company. 
• Implement a policy of three reasons for doing things -- In a lean operation, there are only three reasons for any activity:

                    ° Increase sales

                    ° Reduce costs

                    ° Materially change the customer’s perception of you as a supplier

Everything else is a secondary and probably a distraction.

• Work to outperform your competitors and to gain share -- One or more of your competitors will probably be in denial or hunkered-down in their bunker offices waiting for the storm to pass. This is your opportunity to capture more of the good customers who are out there. Let your competitors keep the turkeys.
• New computer systems and technology will not solve your operating problems -- Don’t get me wrong, computers are critical to wholesalers today but, by themselves, they will not solve your problems. Further, they may cause a few problems during your conversion. Finally, computer conversions can distract your team from the real competitive and operational challenges you face.
• Don’t run your business for the coming upturn -- Sure there will be an upturn but keeping non-performing lines, people, branches, equipment, etc., in anticipation of that upturn will erode your profits and, in the worst case, you won’t be around to see the upturn. 

Some of you may be asking yourselves, “What if he’s wrong about the downturn or what if it is short-lived?” Frankly, I hope I am wrong. The good news is:  If you take action and get your operation tightened-up you will make money during the downturn.  And if the upturn comes sooner rather than later, you will be positioned to make truly amazing profits.

If you would like some reprints of previous columns about running a tight ship, e-mail me at rich@go-spi.com.

            

Rich Schmitt is president of Schmitt Consulting Group Inc., a management consulting firm focused on improving the profitability of distribution and manufacturing clients. Rich is also the co-owner of Schmitt ProfitTools Inc. (SPI), a business producing print, CD-ROM, web and palm-based catalogs as well as pricing management and analysis software for wholesalers.