Recession-Depression, Business Responses - Conventional

This post is about conventional business responses to achieve survival and a turnaround. The next post will present a radical response. 

Turnaround Phases

 Conservation of cash

1.    Prepare a 13 Week Cash Flow, and update it at least weekly. The 13WCF is standard practice among insolvency and turnaround professionals. 13 weeks is within a time frame that an executive / manager can reasonably predict. When I have done turnarounds, I delegated preparation to the CFO and insisted on reviewing updated 13WCFs every Friday by noon. There are many excellent, free templates available; type 13-week cash flow excel into your search engine.

2.    Conserve cash. Not paying bills may be unavoidable. All employees who are not essential to survival must be laid off; the payroll must shrink as fast as the revenue shrinks, maybe faster. Government programs to pay 75% of wages don’t make much sense if the businesses cannot afford to pay the remaining 25%.

3.    If the business is operating, talk with suppliers – they are likely in the same crisis mode. If the business is closed for the duration of the government enforced restrictions, a confirmatory email to suppliers is sufficient. But, if the business cannot pay suppliers now or likely in the future, it is unethical and maybe fraudulent to mislead suppliers, and especially to take additional deliveries from suppliers; so, be careful what you say and do.

4.    Some inventory may be purged at a discount, if and when the restrictions on operations are lifted. Some inventory may be rapidly declining in value with each passing week. As an example, spring rainwear is a fashion item, and it will not be in demand in August, and, another example, consumer irrigation systems are typically sold in the spring, and replacement parts are sold in the summer and fall – miss the spring sales volume, and the inventory must be sold at the best available cash price.

5.    Accelerating cash in will be worse than pulling teeth with chopsticks – other businesses in lockdown will not have money to pay. Those businesses that do have money should be offered discounts and incentives to motivate the capable to pay.

Control expenses

6.    Prepare longer-range scenarios - three monthly income statements and balance sheets for the next 12 to 18 months, showing best estimate, probable worst case, and worst case. Again, the CEO may delegate to a CFO, and should review the scenarios every month. The longer-range scenarios are especially keyed to when the current lockdowns and restrictions will be lifted, and equally crucially how customers will respond. As an example, a chain of 9 restaurants may expect that restrictions will be eased (fewer seats, with double spacing between tables) first in Ontario in two months and in Manitoba in three months.

7.    All expenses should be reviewed, in granular detail. This is not the time for big picture thinking (and I think negatively of people who self-describes themselves as ‘big picture thinkers’). As a rule-of-thumb, any expense category that is more than 0.5% of total expenses should be examined in granular detail. Why does this expense exist? What happens if we stop or cancel that expense? Should we spend more or differently to achieve our goals? Is this really essential under these economic and financial conditions? Can we postpone the expenditure for 90 days, or 2 years?

8.    But, expenses that are crucial to recovery should be shielded from cuts as much as possible. Employee training might be minimized or postponed 120 days; client or customer-centric activities that are valued by customers should continue, perhaps at reduced scale; health & safety programs should be divided into ‘will save lives and prevent injuries’ and ‘good to do someday’ – those are the toughest decisions for me; but, small teams working to establish estimated probabilities will help sharpen priorities.

Consolidation of progress

9.    Start to describe what the future will look like; who will be the future customers (may be different than past customers), how will their behaviour and needs / wants have been changed by the pandemic and recession-depression, what will future operations be, will service, price, safety, convenience be determinant, and how to create a corporate culture that aligns with future customers and operations? Prepare a draft strategic plan; it will not be perfect, of course, but it will crystalize your thoughts. The strategic plan will include the financial scenarios already prepared.

10. Start to make the changes in everything from what was the past to what will be the future. That means that there may be more expenses cut, including salaries, and operational and marketing expenses, and new expenses added or current expenses redirected to the future customers and future operations. 

Continuation or sale

11. Throughout the turnaround process, the executive / owner should avoid consuming the last of the business’s equity and perhaps the shareholders’ wealth by impossible quests for profitability. Constantly ask, Is this working, can we make it work, are shareholders best served by continuing or by selling pieces or all of the business? Do not allow ego to taint managerial decision-making.

Turnaround Essentials

To keep this post short, here is a list of the essentials. For details, see the link below to a complimentary copy of Turnarounds: Brains, Guts & Stamina.

• Good numbers
• Competitive strength
• Customer goodwill
• Creditor co-operation
• Communications
• Managerial competency
• High functioning staff
• Prevention of calamities
• Urgency
• Legality & ethics
• Board of directors / Shareholder support

What’s Missing In The Above? Dealing With Banks

The next post will cover some radical, controversial actions. For now, you need to know that the banks are not your friend and the banks do not have your best interests in mind. The banks are scared, they are most interested in their own survival and profits and bonuses – your business is only of interest and value to the banks if you contribute to their survival, profits and bonuses.

Download book, Turnarounds: Brains, Guts & Stamina

I wrote this book with contributing authors before the previous recession, and it is still a valid and useful guide to turnarounds. You can buy a paperback copy on Amazon and other sites, or here is a link to a complimentary pdf copy:

https://www.dropbox.com/s/vx4vyu2mhgup83z/Turnaound%20Book%20FINAL.pdf?dl=0