The worst of the global economic downturn may be over, but businesses are not out of the woods yet. Not everyone is sure that economic recovery will be strong this year. And certain sectors of the economy may suffer for some time to come.

Nobody seems to be predicting a return to the runaway growth of the late nineties and business owners would be well-advised to heed two recession catch cries: ‘be frugal’ and ‘be prepared’. From a management perspective, this means getting back to basics.

Getting back to basics does not mean adopting an entirely defensive posture. Many of the tactics that help a company survive a recession may also enable it to emerge with an increased market share when the economy recovers.

You will see such companies cut their budgets for marketing, product development and training. They hoard cash and lay off employees indiscriminately. They harm their productive capacity in the process and, when the upturn comes, they need to undo the damage before they can move forward.

frugal adj. characterized by or reflecting economy in the use of resources. (Merriam-Webster’s Collegiate Dictionary, 2001)

In fact, ‘frugality’ means exposing all aspects of your business to intense scrutiny and identifying all activities that do not actually add value. It means cutting costs in those areas or doing away with the activity entirely. It also means investing in areas that do add value and assessing future prospects, so that you emerge from the recession in good shape to take advantage of business opportunities.

prepare v. 1 (a) to make ready beforehand for some purpose, use, or activity (b) to put in a proper state of mind. 2 to work out the details of : plan in advance 3 (a) to put together : COMPOUND (b) to put into written form (Merriam-Webster’s Collegiate Dictionary, 2001)

‘Being prepared’ means taking an analytical look at all aspects of your business and your business environment. For example, it involves collecting detailed data on your customer demographic, on their changing needs and tastes, what they value in your product, and how much they feel it is worth. You may also need to assess the way the recession is affecting your customers, their inclination to spend, and their ability to pay.

In a downturn you are likely to be operating on lower margins. You have less room for error and the consequences of bad judgment will be more serious. Basically, you have to do everything better. That means you need to master all the details of your business and fit them into a larger strategic plan.

You need to be aware of where you are spending every last cent and determine where each adds to or detracts from your bottom line. This is difficult. In fact, it is so difficult that a lot of businesses fail to do it. Take cost cutting for example.

Cost cutting is generally done badly. Mercer Management Consulting surveyed 800 companies in a period covering the 1991 recession and identified 120 firms as ‘cost cutters’. Only a third of them managed profitable revenue growth in the five years after the recession.

This is not surprising given the damage that indiscriminate cost cutting can inflict upon your business. If you cut your marketing budget you risk losing brand awareness, which is a prime business asset. Cut back on product development and you risk falling behind innovative competitors and losing market share. Lay off team members to meet simple number targets and you may lose team members with key skills, which leaves you facing a lengthy talent search when you need to expand again.

If you are lucky, many of your competitors will cut costs across the board. This will hurt them and give you an opportunity to improve your market share. In good times, everyone thinks about spending, expanding, and building capacity, so it’s relatively difficult to make gains on your competitors.

Where other businesses just ‘cut costs’, you should engage in strategic cost management – a practice that will serve you well in both good and bad times. For example, you should try to move your fixed costs to variable costs. Your fixed costs are the ones that stay the same regardless of the amount you produce. For example, the rental costs for a plant are the same regardless of how much the plant produces.

In a downturn fixed costs can become a problem, because they are likely to be relatively large compared with your variable costs.

Variable costs change according to your production levels. For example, raw materials are likely to be a variable cost for manufacturers. If manufacturers produce less, they use fewer raw materials and thus encounter fewer costs for them. It is easier to bear variable costs in a downturn, as they diminish as your production levels fall.

A downturn is a good time to carry out a thorough break-even analysis. A break-even analysis calculates the amount of goods or services you need to produce in order to cover your costs and start making a profit. If you have high fixed costs, you may find that you cannot sell enough of your product in a downturn to cover your expenses.

You then need to identify where you can reduce your fixed costs. If you find a way to operate on lower fixed costs, any downturn will be less threatening. Often, companies look on salaries as a fixed cost and therefore lay off team members, while expecting the remaining team members to carry out the same amount of work. However, as discussed, cutting the salary bill needs to be accompanied by a careful evaluation of where your team members are adding real value. There's no point laying off the team members who are keeping your company afloat.

Evaluate all your assets. If they are non-core or unproductive assets, consider selling them. If you have unused land, property, or equipment, it may be better to sell and convert their capital value into cash reserves.

Review all your discretionary expenses. For example, do you and/or your team members really need to travel business class when you go to meetings? Palmtop computers might add value in some job roles, but could be just an expensive supplement in others.

You can also review your contracts. A downturn is a good time to secure long-term contracts with valuable and dependable customers. This can give you a dependable source of income. Be willing to offer deals and concessions to entice customers to sign.

You may have already segmented your customers according to the value they offer your business. Try to cement the loyalty of your most valuable customers by offering them high levels of service. Focus on them and retain them as a dependable source of income. At the same time, retain a diversified customer base, so that the loss of a small number of customers will not threaten your business.

You should review your business finances on a regular basis yourself or have your accountant reporting this information to you. Such reviews can alert you early on to financial warning signs.

Look for early financial warning signs

Ask yourself:

• Is your working capital or cash flow decreasing?

• Are you failing to meet your budget projections?

• Are your costs increasing with no corresponding increase in revenue?

• Is your return on investment decreasing?

• Are you maintaining your profit margin?

Keep an eye on financial indicators and use them as early warning signs. For example, your free cash flow can give you an idea of the current health of your business. Free cash flow is the amount of cash your business generates in excess of what it needs to run.

It’s also useful to keep tabs on your net operating profit over the cost of capital. This tells you whether your assets are adding value or consuming more in service than they produce in revenue.

Productivity is another useful indicator. Your productivity is calculated as the value of your outputs divided by the value of your input. If your productivity increases it means you are creating more value at less expense.

Your RAN ONE business developer can help you calculate and interpret these indicators.

Manage your cash flow

Cash flow is often a problem in downturns. Fixed costs stay the same but sales may fall, reducing your profit. Customers are slower to pay, while you may need to keep paying your bills on time. Even if your business is fundamentally sound, cash flow problems can emerge in a downturn.

Preparing monthly cash budgets can help you keep an eye on the short-term, unforeseen, and seasonal factors that have an impact on your cash flow. You should actively manage your accounts receivable, accounts payable, and inventory costs.

This means regularly reviewing outstanding debts, aging your receivables on a monthly basis and stepping up efforts to collect overdue bills. See if you can make payment more efficient. For example, you might be able to set up electronic payment arrangements with your clients. This can speed up bill payment considerably.

Keep an eye on your customers and their creditworthiness. Consider employing a credit agency to scrutinize any new business customers. Set credit limits, invoice on time, and send regular reminders. Be rigorous in collecting debts, but be astute and non-confrontational in the way you pursue overdue accounts.

At the same time, get the best possible repayment terms for money you owe. Negotiate extended terms or discounts for early payment when you buy goods, for example.

Try to reduce your own debt. If you liquidate assets to generate cash, think about paying off existing debt to reduce the ongoing drag on your cash resources. But try to increase your credit resources, just in case you need them. If your lenders will give you higher credit limits, take them.

Minimise inventory costs

You may have a lot of money tied up in excess inventory. You will only know if the inventory is excessive if you keep regular tabs on the supply of goods and customer demand for these goods.

You may already run a lean operation and have reliable suppliers who minimise your inventory costs by delivering goods exactly when you need them. But a downturn is a good time to review the relationship with your suppliers. Are you communicating with them as effectively as possible?

Many companies rely on building a trusted relationship with their key suppliers, but a downturn may threaten such a relationship. What would happen if one of them went out of business? Do you have any backup arrangements in place?

Review management

Review your management performance. Are you and your managers making good decisions, delegating well, and managing your time and responsibilities effectively?

Are you operating within budget? Are any tensions or strains developing between management and other team members?

Look for alternatives to hiring salaried team members. If demand is high, consider increasing overtime or hiring temporary or contract workers. You can also think about outsourcing or investigating whether you can get your suppliers to carry out work for you.

You also need to review your assets and the way they are performing. Is equipment being adequately maintained? Is it still in good condition, up-to-date and able to produce with competitive efficiency? Would equipment upgrades increase your efficiency?

Market your company economically

Companies that cut their marketing budget in a recession may come out of the recession with a reduced market share. But while you need to maintain your marketing efforts, you should also seek ways to get a good result with fewer costs.

For example, you might find that you can gain low-cost exposure by using trade fairs, or giving speeches at conferences. Try to get more for your marketing dollar by targeting your customers more effectively. Review your customer demographic and try to find just the right publication, radio station or website that will reach them.

And don’t market your offering based on hunches. Follow up your marketing activities with surveys to find which marketing activities actually boost sales.

Value honesty

Consider your company’s human capital. Your team members are likely to be under stress during a downturn. Try to maintain their loyalty by dealing with them considerately and honestly. When you decide to cut back, you need to fully communicate the reasons. Your team members need to be on board completely or the efficiency of your business will suffer.

Be equitable. If you cut costs, target conspicuous privileges such as executive parking or country club memberships.

Be aware that carrying out an exercise such as a break-even analysis is not a simple matter. In tackling this and other analytical areas of your business planning you should seek the advice of your RAN ONE business developer.

For example, your RAN ONE business developer may be able to suggest ways for you to cut fixed costs. You will be able to work together to identify areas where you can cut costs - by forming partnerships with your suppliers, for example. Or it may turn out that a downturn is a good time to refinance your loans at lower interest rates.

Be sure to read each article with the mindset “How could this apply to our business.” Thinking of it that way will guarantee that you get value. Better yet, take notes as you read and commit to having the ideas implemented by the time the next edition arrives. Also, make copies for each team member. To really make sure something positive happens, work with your business development specialist to talk your team through the ideas and how to set a schedule for getting them implemented. We’re here to help you get started.

"The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year."

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

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