Ten Most Important Steps to Take in a Downturn

Many kitchen and bath dealers around the country are feeling varying degrees of pain from the bursting of the new house construction bubble. For dealers tied to new construction, sales are off, cash flow is tight and creditors are calling. On the other hand, those dealers positioned toward the upscale remodeling markets with a diversified mix of products and services seem to be faring fine.

While remaining optimistic in the face of bad economic news is a noble objective, it can also be a deterrent to taking prudent, decisive action. Many owners look at the bright side of things and expect the weak sales of the current month to rebound quickly. Unfortunately, this approach has gotten a lot of small businesses in serious trouble.

Even a month or two of delay can wreak havoc, and make a strategic turnaround more difficult.

From both the recommendations of professional crisis managers and many of my own personal experiences, here are the 10 most critical actions to take when confronting a business downturn.

1. Shift your mind-set and provide effective leadership. That starts with believing the adverse economic signals are real as they relate to your business. Your mind-set needs to shift toward greater competition and a greater focus on the client. Owners need to set a direction and strategy as well as be highly visible. If you have key accounts, such as builders or remodeling contractors, visit them and find out firsthand the real reasons for declining sales. Then react quickly by thoroughly analyzing the marketplace and taking action. Paralysis from the fear of making changes is the worst mistake owners make; those whose feet are set in concrete are not likely to be in business when the economy recovers.

2. Don’t take projects in bad times that you wouldn’t accept in good times. For example, dropping prices 15% would require an additional 44 percent in revenue volume to capture the same amount of gross profit dollars to cover existing overhead. In the short term, you may get cash deposits to pay some creditors off, but it’s the beginning of a nasty downward spiral. That’s because experts agree that it is frankly impossible to “grow a business” during an economic downturn.

3. Budget your business to its absolute core. Review your Income Statement and cut all accounts, personnel and activities that do not add direct value to the client. Creating an initial Three-Year Budget is beneficial because it gives you the insight to take positive actions if income levels return more quickly than projected. Make decisions strategically; shrink now but leave enough “muscle” in the budget – like marketing – to gain greater market share now when competitors are cutting this expense. It will also put you in a better position to grow faster when the economy rebounds.

4. Create “what if” scenarios. Develop “best case,” “moderate case” and “worst case” budgets to determine which set of actions is most plausible. Experts agree that the goal during a business downturn should be a positive cash flow, not making a net profit. Owners should be the first to take a pay cut – to a level that covers their basic living expenses. Work with your key people when down-sizing. Have a trusted business advisor review your preferred plan to ensure you are making all the right moves. Then, be prepared to make all the cuts at one time, communicating your strategy to your remaining staff and your confidence that the business will survive.

5. Establish the Cash Flow Forecast as your key managing tool. The Annual Cash Flow Forecast is a byproduct of the Three-Year Budget and is useful to confirm a positive cash position with a break-even budget. However, it’s the Three-Month Cash Flow Forecast – updated monthly, weekly or even sometimes daily as a downturn worsens – that is the fundamental document professional crisis managers use to turn around companies. Other helpful reports include Accounts Receivable Aging, Accounts Payable Aging, Balance Sheet and Income Statement compared to budget.

6. Create a Forecasting System for leads, sales orders and income. Based upon historical data, this system sets monthly percentage goals for these three key business indicators. By posting your actual monthly results to each forecast, you can (a) quickly compare results for each indicator against the forecast and the previous year’s results and (b) project end-of-year results based upon cumulative percentages. If there are gaps between goals and actual results, you will be prompted to take alternative actions or experience the painful consequences.

7. Secure a credit line before you need it. This may have to be a home equity line of credit for most small business people. Draw down on the line and place the proceeds in a savings account at another bank. Otherwise, the originating bank may cancel your line of credit if either the business downturn worsens or you don’t use it.

8. Develop a superstar on staff to collect accounts receivable. This person must be a tyrant with collections. There are three categories of non-payment: “can’t pay,” “won’t pay” and “shouldn’t pay.” Have your superstar focus on the “won’t pay” category. With the “shouldn’t pays,” uncover the dispute and resolve it early.

9. Get organized to use more subcontractors and part-timers. Following this strategy will save a lot in benefits and payroll taxes. Cutting hours or pay are only short-term solutions; use these strategies only in temporary situations. When laying off people, do it quickly as repeated layoffs will hurt staff morale. Be sure to consult with legal staff when planning layoffs so it’s done right.

10. Get and stay close with your creditors. Advise them of your down-sizing plans so they don’t hear about them through the grapevine. Always be honest and up front with your creditors as to when you can realistically send them your payment. If something prevents you from making a payment as projected, take the initiative and inform your factory contact immediately. Work with your creditors on solutions and negotiate new terms when possible. However, avoid making commitments that can damage your ability to buy from other important vendors.

In summary, no matter how difficult, don’t delay the decision to down-size. Delaying needed cuts is the number one reason most businesses fail in a downturn. Think in terms of implementing three cost programs: (1) cost control, (2) cost avoidance and (3) cost reduction. Remember, all turnarounds are strategic and should be planned quickly, thoroughly and effectively.

When your company emerges into the sunlight again, please take the following pledge to avoid the pain of future downturns: Promise yourself to keep at least six months of your overhead expenses in a liquid portfolio (i.e. CDs, money market funds, mutual funds) that’s separate from your retirement account. Avoid putting too much of your money into real estate investments which are more illiquid. This strategy will enable you to weather the next storm far more effectively.