Posts Tagged ‘recession’

Don’t Destroy the Long Term Value of Your Company……

Friday, February 26th, 2010

The economists are still trying to figure out how long and how deep this downturn will be. As a business owner I think they’re missing the point. The point is that this downturn or recession will come to an end as every one before it has done. That, and the fact that this one is different from any other, are the only things we can say with certainty.

There are 2 types of financial reward for being a business owner and, while it is still with us, the recession will almost certainly affect 1 – annual profits. For some companies they (and the bonuses and dividends that result from them) will be smaller than in previous years. But the recession should not affect the second reward – the ability to obtain a premium price for your business when you sell it – unless you allow it to. 

How do you avoid the danger of letting current events erode the value of your company? The first step is to ensure the (strategic) awareness that the recession will end influences every short term (tactical) decision you make. Keep your long term goals firmly in mind as you make the changes that are required in the short term. The second step is to continue positioning the business for its eventual sale.

The value in a company lies in it’s future as a going concern – independent of current ownership. The same things that guarantee that a company has a future – Plan, People, Process and Peformance in my language – make it independent of any specific owner. All potential buyers will look at historical financial results in arriving at a valuation for a company. But there’s more to a going concern than the strength of its past, normalized EBITDA. Informed buyers will look for the things that will continue to produce great financial results in the future.

Consistent, superior Performance is perhaps the most visible way of demonstrating your company’s potential as a going concern. While the performance during next year and perhaps even 2011 may not be what you anticipated only 18 months ago, remember that success is relative. Outperforming your competitors, and growing more quickly than the industry, for example, are tremendous accomplishments in a recession. Successful companies perform well in any market conditions.

If your business Plan for 2010 and the following 2 years has not been modified yet, this is a good time to do it. Modifying your existing strategies to, for example, put more emphasis on customer retention may be an option. Considering how to finance growth opportunities – resulting, for example, from weakness in a competitor – might be wise if cash flow is likely to tighten and external financing remains tight. But these steps are about changing how you will achieve your vision and goals, not about changing the vision/goals themselves.

Having a planning Process involving the management team – large or small – is one way to show the company is independent of the owner. Most companies have financial, operational and human resource processes in place. But some key processes, for example, a disciplined approach to developing and launching new products or selecting and entering new markets are less common and present owners with opportunities to increase the value of the company. There are also fewer companies with a well mapped sales process, which would give them everything from better forecasting to higher close ratios, than you might imagine.

Despite the fact that cutting headcount is a quick way to cut costs, this is not the time to let good People leave your company. My definition of “good” prioritizes those who, because of their experience in other growing companies, know what has to be done to add value to yours. A strong culture will drive a company forward regardless of who is at the top and is based on never losing sight of the values and beliefs on which the company was founded. The current situation is also an opportunity to implant strong change management skills and get every employee engaged by asking them to contribute their ideas for implementing the company’s strategies.

A flexible plan, wide spread use of well thought out, documented processes and people who can implement both of them will drive great performance – which will lead to great Profits. So, make the decisions required to meet today’s challenges in the context of building the company’s value over the long term. In that way you’ll reap both sets of rewards for the long hours, financial risks and strained relationships that come with the title of business owner.

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6 Tips for Managing in Recessions

Sunday, July 26th, 2009

Despite what the media suggest, the recession will not lay waste to every company and household in Canada. Some will be seriously affected and my sympathy lies with them. However, for most of us the impact will be bearable. We know from experience that there are things you can do to mitigate, even minimize, the impact of a recession and articles containing tips and suggestions are already becoming quite common. Here are 6 of what I consider to be the most valuable ideas from the articles I’ve read recently.

Tip # 1. The best time to look for money is before you need it, so make contingency plans now. Do a spreadsheet analysis of the impact of a 5 or 10% decline in sales on your cash flow. Go and talk to your Bank, they’re tightening their terms and restrictions already but they will work with you if you’re a good customer. It’s also a good idea to build a relationship with a second Bank, if you haven’t already done so.

Tip # 2. Look inside the company for cash, for example….can you renegotiate payment terms with your suppliers to avoid borrowing money to pay them? Or will they give you a discount for cash payments? Can you trade off extended lead times, less than 100% fill rates, variable (but not unacceptable) product or service quality against price reductions to improve your gross margins? Sell off unproductive assets, aggressively discount and sell slow moving (i.e. almost dead) inventory, don’t let your Accounts Receivable extend their payments.

Tip # 3. Don’t Lower Prices – Add Value. Avoid the temptation – and pressure – to cut your prices. It will be almost impossible to raise them again later. Either launch a de-featured version of your current product or service and attach a lower price point to that. Or talk to your customers and find out what they need to deal with their challenges and find other ways to “add value” to your current offerings without inflating the cost.

Tip # 4. Don’t make deep cuts to headcount. Letting good employees go can have serious long term effects. You immediately lose the investment you made in training and developing them and you lose an employee whose strengths – and weaknesses – you know. It’s also not uncommon to find that an employee you’ve laid off carried far more knowledge about the operation of the company in their memory than you had realized – and didn’t write it down before they left. There are always some employees who are not pulling their weight. If you have to let anyone go, release them.

Tip # 5. Don’t make deep cuts to promotional activities. Resist the temptation to reduce your promotional budget. If you’ve spent money to create awareness you’ll lose the benefits of that investment if you stop or dramatically reduce your expenditures on, for example, Trade Shows, Advertising and Sponsorships. Look critically at the response rates for your promotional activities and freshen the message or switch dollars from one tool to something more effective – but don’t make deep cuts to the total dollars.

Tip # 6. Help your employees cope. Watch for signs that your employees – particularly the key members of your team – are having problems coping with the recession personally. Everyone makes bad decisions occasionally and, given the easy access to credit of the last few years, many people have overextended themselves. Help them find the advice or counselling they need to deal with their temporary problems. Don’t solve their problems for them – but support them while they do it themselves.

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