Managing in a Storm: Strategies and Tactics in a Changing Economy

What goes up must come down!  This is the law of gravity.  It also applies to the economy of the U.S. (and other countries as well).  Our economy has grown in each of the last ten years.  This expansion has lasted twice as long as the average expansion since World War II.[i]  During this period, especially during 1998 and 1999, it seemed old economic laws were being rewritten.  Economists talked of the repeal of the economic cycle.  But as the past few months have shown, the economic cycle is still very much with us.  Businesses are being buffeted, perhaps for the short-term, but buffeted nonetheless by the winds of economic change.  This ten-year period of sustained economic growth lulled many managers into a false sense of security.  For truly, what goes up is now, in many cases, coming down.

In this paper, we will discuss short-term tactics and long term strategies that can be used in the uncertain economic environment that may face your business.  Many of the points mentioned are important no matter what the economic outlook facing your business, and essential when your business is facing a slowing economic outlook.  

Tactics for Dealing with Economic Turbulence

The first thing to keep in mind when trying to deal with a slowdown is not to panic.  To understand how your business could be affected by a slowdown and what you can do about it, consider the following tactics:

Develop a cash flow forecast:  It is surprising how many times even medium-sized companies do not have a good process for projecting cash flow.  If business is slowing, understanding the magnitude of cash deficits and when they are likely to occur is critical.  Electronic spreadsheets make constructing and updating a cash flow statement relatively easy.  We recommend that the forecast cover a period of at least six to twelve months.

Clients sometimes ask us why they should do this since a cash forecast may not be any more accurate than those of the local weather forecaster.  The answer to this is that a reasonably developed forecast will highlight periods when a business is facing cash shortfalls.  This allows managers to (1) focus on their assumptions and make certain they are correct and (2) cause them to take actions to reduce the expected cash shortfall.  This is the most critical tactic to managing in a changing economy.

Aggressively manage receivables and inventories:  Inventories and receivables can suddenly grow in a slowing economy.  Many customers deliberately slow their payment cycles.  Inventories built in anticipation of customer orders suddenly begin to just sit there.  Changes in these two balance sheet items have a negative impact on cash flow.  Are the receivables in the over 75-day category increasing?  Are your days/receivables increasing significantly?  Monitor payment patterns of individual customers.  If patterns change, contact these customers.  Closely track inventories.  Do not build inventories in anticipation of sales.  Only add inventory when you have confirmed orders.

Stay in touch with your customers:  Now is the time for senior managers to be visiting key customers.  Listen to what these customers are saying about their business outlook because they can help you in your own planning.  Also, formalize your internal sales and marketing information process.  For example, start tracking lost orders.  This is not a dancing on the grave activity.  By tracking lost orders, determining why they were lost, and knowing who won the order, you can sharpen your companys marketing efforts.  Tracking delayed or deferred orders is also important.  When customers start delaying orders, this can be a signal of future problems.  Importantly, it is a clear signal to be wary of both receivables and inventory that you have with these customers.

Take every opportunity to remind customers of the value you are providing.  Customers may not recall the extra inventory you are carrying for them or the time you quickly filled the order so the plant did not shut down.  If you are not doing it already, develop a report card for key customers showing them your performance.  Demonstrating tangible value can prevent your company from being a victim of customers cost control measures.

Make fixed costs variable:  Look at your income statement.  Which of your key fixed cost elements can you make variable expenses?  You may choose to have the machining for a product component done by an outside shop rather than investing in the needed new equipment.  In this manner, you avoid the depreciation expense as well as interest costs associated with the investment.  Yes, the component may be slightly more expensive when purchased from the outside but the fixed costs that you must cover are reduced.

Talk to your banker:  Bankers do not like surprises!  If your cash flow shows that tough times are heading your way, contact your banker and see what can be done.  Also, reread your banks loan covenants.  Nearly all loan agreements have them.  Understand which ones you are in violation of or are likely to violate.  Remember, your bankers primary interest is having a successful customer who can repay the loan (with interest) and they are often willing to work with you.

Strategies for Growth

Strategies for growing in a slowing economy may sound oxymoronic.  But an economic slowdown does not affect all industries or all companies in an industry equally.  Moreover, economic slowdowns cause companies to take steps to reduce costs that create significant growth opportunities.  Consider the following strategies:

Stick to your plan: If your company is not facing severe cash flow problems and has the capacity to weather a downturn, dont let short-term conditions dictate long-term strategy.  Keep your strategic plan in mind when you make daily decisions.

Do not become indecisive:  Sometimes when otherwise decisive managers face tough economic times, they suddenly become unable to make decisions.  It is especially critical when times are slow to make sound decisions and make them quickly.  This reassures suppliers, employees, customers, and bankers.  Many times, managers become unable to make decisions because they do not have the needed information, especially projected cash flow.  If additional information is what is needed to make a good decision, get it, make the decision, and move on.

Outsource other company's functions:  In slowing economies, many companies choose to outsource functions that have been performed internally.  Outsourcing portions of the manufacturing, shipping, or distribution operations are examples of opportunities.  Such moves create opportunities for nimble companies.  Look at your customer base and see if there are opportunities for such outsourcing.  Do not be bashful about pursuing such business.  Managers are looking for ways to reduce costs and improve service.  If you can do these two, you are likely to have a willing listener.

Look for growing customers:  In most any market, there are always customers who seem to weather a downturn.  Rather than cutting back your sales and marketing efforts, focus them on identifying those customers that are still buying.  It takes more looking for these customers so make certain resources are available to find them.

Take advantage of weak competitors:  A slowing economy tends to weed-out weaker competitors.  Part of a sales and marketing plan for a slowing economy should identify the weak customers and their key customers.  Sales and marketing efforts should be directed to these customers.

A slowing economy does not have to make your company one of its victims.  Managing the changing and shifting tides of such an economy requires an optimistic outlook, a disciplined strategy, and an opportunistic approach.  The storm can sometimes be predicted and always be managed!

[i] "Americas Economy: What a Peculiar Cycle," The Economist, March 8, 2001.


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