Preparing for the Upturn

One business benefit resulting from a deep economic downturn is the thinning of the herd of underperforming and poorly managed business enterprises. Companies that were underperforming before the downturn are severely handicapped in a downturn and will do everything possible to hang on, hoping that when the economy improves, their financial performance will improve as well. More so than not, these companies will just make it through the downturn and won’t be able to survive the upturn. They won’t have the cash resources to hire back employees, manufacture and build inventory, and ship product. They will have reached their credit limits with their lending institutions, and many will be in violation of their loan covenants. Surviving will depend on whether shareholders and investors are willing to inject cash or the business can be sold. Otherwise, the business is destined for an orderly liquidation.

In most instances, when a business fails, it is not because management doesn’t know what to do or can’t figure out what to do. It fails because management doesn’t do what it knows it needs to do, or it doesn’t know how to do what it needs to do. Regardless, the business fails because of management.

The best test of how well a company is managed is how well it performs in a downturn—the result of a management process that plans, executes and controls the business to achieve established financial and operating targets and makes needed adjustments when required. This is demonstrated repeatedly by companies whose management provides year-over-year consistency in profitability and earnings by adjusting their company’s cost structure, business plan and operating performance to align with the current economy and revenue base to maintain profitability. These managers demonstrate they have designed their businesses to achieve the results they get. They have the rigor of management processes in place and constantly monitor performance in order to take corrective action, modify their operating plans and seize new opportunities that arise.

The rigor of management processes are embedded in the design of the business and require management’s responsibility to plan, execute and control the business entity, optimize investment opportunities and use of resources and assets, make corrective adjustments when necessary and capitalize on opportunities. Even with strong management processes, there is no assurance the enterprise will be successful or survive, but they sure improve the odds of success.

Strong management processes are not processes designed to be administered. They are processes designed to achieve results. Good administrators are not necessarily good managers, and strong management processes will not make administrators good managers. By their very design, strong management processes are integral for management’s ability to build for the longer term, and at the same time, deliver in the short term. With strong defined management processes, a culture evolves that demands discipline in management and recognition for initiative and achievement. The management processes continue to evolve as the business changes. They are always action and results oriented.

The rigors of management processes advocate monitoring performance constantly and making adjustments as needed in a dynamic environment. When a business begins to severely underperform financially, it’s not because the annual budget is wrong, it’s because the business plan is wrong and needs to be adjusted, or the plan is not being executed. The annual budget is only the projected economic performance based on the business plan. If there is only an annual budget without a business plan, the budget is nothing more than a good intention or hopeful outcome resulting in many of the following:

• Declining cash flow

• Negative variations to budget

• Excess inventory and obsolescence

• Lost revenue from failure to fill customer’s orders completely

• Increasing receivables delinquency and slower payment by customers

• Increasing total cost structure with declining revenue base

•  Loan covenant violations

If your management processes do not already include the business-planning process, now is a good time to make business planning an integral part of your management process. Every executive and employee should know exactly what the business plan is, how the company will get through the economic downturn and how it will be successful in the economic upturn. They should know the actions the company will take and the expectations the company has of them and management to execute the plan, achieve the planned results, monitor performance and adjust the plan and actions accordingly to meet the changing environment.

Managing through a deep economic downturn can be achieved successfully with rigorous involvement and short interval management of the company’s operating and financial performance. Companies with strong management processes and the rigor to follow them generally outperform companies that don’t have strong management processes. They are relentless in their efforts to be successful by controlling their costs, improving the use of assets, managing cash, improving service to customers, executing and managing their operating plans and rapidly adjusting the plan or taking corrective action to meet the plan.

There will be additional economic downturns in the future. Just surviving the downturn is an option, and no company’s management should believe the company will not have to perform differently when the economy improves. Identifying the improvement requirements coupled with managing through the downturn is a major undertaking. However, many of the changes a company implements to get through the downturn are indicators of improvements needed to be successful in the economic upturn. These may have included improvements by simplifying and streamlining processes; optimizing the use of existing information systems and technology to enable more efficient processes; organization realignments that increase the focus on and responsiveness to, customers; devising new services, order configurations and delivery methods; elimination of poor performing products; adherence to customers’ order specifications and service requirements; and, the use of new performance measurements.

Companies that emerge successfully from the economic downturn will be smaller, more flexible and proactively responsive to customers’ needs. They recognize the attributes that made them successful prior to the downturn may not be the attributes to make them successful and stronger, in the new economy. Their primary focus will be on the basics and getting the basics down to a standardized system where they consistently and reliably, do the right things, and, do the right things right. As customers emerge from the downturn, the expectations they have of their provider’s performance and value will be greater, as the expectations of their customers have increased. Customers will be even less tolerant of mediocre providers.

Getting through the economic downturn successfully creates major challenges for every company and their management. Defining how the company will emerge and be successful in the economic upturn may be more challenging. Now is the time to prepare for the future requirements that will be needed.

 

Bruce E. Jacobs is a management consulting partner with more than 28 years of experience working with executives and their management teams to improve operating performance, increase shareholder value, develop and implement business strategies and operating plans to achieve systemic business improvements. He has spent more than 20 years with two international accounting and consulting firms. He can be reached at (314) 704-0693 or at [email protected].