Surviving the downturn
Monday, December 8, 2008/
Here are some tactics that have worked before, and will work again, if you want your business to see the other side of these present difficulties.
I see that at the bottom of this little piece that I write each week there is a mention of me as an entrepreneur. Well, that was some time ago. Having left my own business I became involved in consulting and believe that I have come to be looked upon as specialising in turnarounds. Which brings me to the point of today’s little piece.
There are some businesses that are doing it hard at the moment, and with the unfailing assistance of economic gurus, there is a risk that a lot more businesses will be doing it hard next year.
It reminds me of the early ‘90s when people called me in after the bust of 1989. Businesses were doing it hard and quite a few businesses that called me in those days were on a knife edge. Fortunately, we were able to pull a few tricks out of the turnaround basket and these businesses are not only alive and well today but flourishing.
I thought it might be helpful if I listed a few do’s and don’ts for people who might find themselves in a similar position today.
The first temptation when facing financial difficulties is to try and borrow more money. That is a last resort that should be avoided at all cost. Indeed, back in those days, what we did was to get people organised to pay down debt rather than increase debt.
There was a temptation in those days for firms to get outside their core competency and become involved in businesses that might have some relationship to what they are doing, but after rigorous appraisal it turned out that they were really different businesses.
We either closed those non-core businesses or let people take them off our hands, sometimes for a price but generally just to get the demand on cashflow off our books and on to other people’s books – who hopefully knew more about running such businesses.
Sometimes, these associated businesses were occupying space that cost my clients recurring and expensive rent. In the event of divestiture, the new owners would take up responsibility for the rent and reduce demands on the cashflow.
Where the businesses were completely closed down, there would be a vacancy of expensive space that no one wanted. In addition, by thoroughly examining the entire operations of the core business, we would find inefficiencies in the use of people and space and, with a little restructuring, less space would be required.
The next stop was a knock on the door of the landlord rather than waiting for the landlord to knock on my client’s door.
These businesses were basically good but in trouble because of poor management as a product of the belief in the late ‘80s that the world as they knew it was never going to come to an end. By presenting new financial scenarios to the landlord, which assumed the need for reduced space and a lowering of the rental as against the amount specified in the lease, but with a promise to continue occupation well into the future, we achieved some good win-win, results.
Rather than the landlord sending the business to the wall by insisting on the continuation of the existing lease and then being in a position of having unleased and unleasable space, the landlord saw the bigger picture and rewrote the lease for less space and lower rental with the provision for review to market when things turned.
As a result of restructuring, the businesses therefore would have fewer people, less space, a significantly reduced rent and a surplus cashflow that could be then used to address the pressure from the bank (which generally was far greater and less accommodating than the pressure from the landlord).
Another development was occurring in those days, and this was a rapid expansion of technology and its capacity. However vendors were in a pickle because they had this new beaut stuff on their floors but in the economic downturn (in those days we called it a recession and we didn’t have to wait for the gurus to announce we were in recession, the P&L told the story) they couldn’t shift it for love nor money.
Anyone who could come in, make any kind of offer, and could walk out with the latest and best technology that put them ahead of their competitors. So I was able to persuade clients to take the risk and acquire the new technology at bargain basement prices.
As a result that became more productive and the unit cost of production dropped, which gave them a margin competitive edge. As they came out of the recession, they were then market leaders and in a position to move ahead with even later technology.
Another development that was common was the hard luck story of people who needed work done but couldn’t afford to pay. There would be all sorts of offers about “when the project is finished”, like the story about the cheque being in the post.
When work was hard to come by, the temptation was to take on the risk of non payment. I persuaded clients not to go down that route because all that would happen would be that over heads would increase and place greater demand on cashflow, and in the end the business that had secured credit would not be able to pay.
I used to emphasise that banks were in the business of lending money (not that they did much of that in the early ‘90s) and hadn’t handled it all that well. So I urged business to stick to their core competency and keep out of the business of lending.
Some awful disasters occurred by businesses continuing to extend credit in order to get work without understanding the credit worthy risks involved in such lending practices.
Anyway, for starters, they are some of the things that worked for my clients and I am fortunate to still have many of them as successful friends. It was also a great opportunity to learn about fiscal prudence and the lessons have stood them in good stead in recent times.
Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.
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