During challenging economic times, chief executives need to focus on four key elements of their business. Here is time-tested advice:
Make a Plan
A plan is not your budget. It’s an agreed-upon course of action to maintain healthy revenues in the light of changed circumstances. Plans need to be made quickly–follow your instincts and avoid “paralysis by analysis” Here are steps to take when building your plan:
- Develop your plan to reflect current market realities, not a “better” reality that you hope will come in a few months.
- Have a “Plan A” and a “Plan B.” Plan B should be ready to put in place should things get worse (i.e., a greater-than-expected decrease in revenues).
- Have your team agree on the plan.
- Document the plan and assign responsibility to your key executives for each of the actions contained in the plan.
- Review the plan weekly against the previous week’s results. Adjust your course of action as needed.
You can never cut costs fast enough to replace revenue. If your revenue is slipping, it’s time to take these steps:
- Maximize sales of your most profitable products.
- Rank your most profitable customers (those who pay on time, buy your most profitable products and give you the least amount of trouble). Stay close to these customers by visiting them on a regular basis.
- When cutting costs, don’t lay off motivated sales people; instead re-incentivise your sales force to pursue new profitable customers.
Cost cutting in itself is not a solution; it’s a part of the solution. Many people think that costs are fixed, but in fact all costs can be varied over time–there is no such thing as a fixed cost. Go through your expenses line by line and cut everything that doesn’t favorably impact near-term revenue. Don’t make cuts that affect employee morale (for example, don’t cut your Christmas party or your coffee supplies). When it comes to people costs, follow this general hierarchy:
- Cut consultants and contractors.
- Let casuals go.
- Make staff take annual leave. (While this does not have a cash impact, it does help your balance sheet.)
- Impose a hiring freeze.
- Impose a salary freeze or salary cuts for the chief executives and the board and make this information public. After this is done, impose a freeze or cuts for your staff. (Remember officers must bleed before staff.)
- If you have to cut staff, only do it once and do it hard. When cutting staff never ask for volunteers. Make your decision based on what’s best for the business and what optimises your cost and cash flow.
- Always retain your best workers.
- Lastly, officers should never take vacation after staff layoffs.
When coming up with a cost-cutting plan, be sure to calculate the impact of your actions both in terms of cash and profit. Additionally, once you have your plan in place, repeat the planning exercise with the goal of trimming costs by a further five %. Lastly, try to identify your “sacred cows” and objectively analyse whether those can be cut as well.
Manage Your Cash
Businesses don’t fail because they aren’t making a profit; they fail because they aren’t generating cash. Have your CFO shift the focus from profit and loss to cash management. Also:
- Review your cash flow weekly against a three-month forecast.
- Ask your suppliers for additional payment terms of 45 days or more, but pay small creditors on time to avoid damaging your local reputation.
- Set new credit limits for customers and demand prepayment for big items.
- Focus your inventory on high-velocity or high-margin products.
- Get rid of redundant, obsolete or slow-moving stock. It’s not red wine, and it won’t improve with age. Remember the adage, “First loss is best loss.”
- Set debtor days where your staff becomes the “squeaky wheel” collecting payment.
- Set creditor days where your staff asks for more payment time from large creditors.
- Don’t allow claims to build up. Customers use claims as an excuse not to pay.
- Quantify the effects of these actions and establish a “fighting fund” from the money taken out of working capital to be used as a cash buffer.
A Final Note to CEOs
In difficult times your staff, clients and vendors expect you to take decisive action to keep your company healthy. As a CEO it’s extremely important that you stay visible and involved. Communicate what you’re doing on a weekly basis even if you think your staff and customers already know. This is not a time to be out of the office for extended periods. CEOs need to be around, be seen, and be leading.