Are You Smarter Than a Recession?
Thursday, August 9, 2018
Posted by: Hilary Korabik
Are You Smarter Than a Recession?
How to Prepare for an Economic Downturn
by Rob Nowak of Baker Tilly Virchow Krause, LLP
Look ten years in the rearview mirror and the economic collapse of the construction industry has likely faded from view. However, is your business prepared to survive another less dramatic, yet considerable economic downturn? Do you know how to protect your business from even the slightest of economic hiccups?
The best time to prepare for a downturn is during a period of robust growth and economic prosperity. I know what you may be thinking –“I’m too busy doing the work now to even think about planning for when we don’t have the work.” Creating a plan in a deliberate manner now – when you do have plenty of work – helps ensure the plan is supported by detailed analysis, adequately considers sequential actions and takes into account seasonality. The goal of the plan is to maximize the options available to decision-makers by addressing considerations related to contractual obligations, personnel and customer satisfaction.
But what makes a plan flexible and executable? In any plan, action steps must be scalable and sequenced, and grouped by corporate function or operating unit. This ensures ownership for executing each step is clear. Regardless of the contingencies, any plan should address the following key areas:
1. Focus on the customer
Focus on refining your approach to ensure outstanding customer service and communication is a high priority. Providing outstanding customer service is the factor that differentiates your business from competitors and can be the competitive edge that retains customers, even in the face of deteriorating economic conditions. Especially in a downturn, you want your customers to be able to count on you for delivering what you promise, when you promise. Start now and firmly plant yourself in your customers’ good graces.
2. Trim non-essential services
Review your current contracts for services, subscriptions, licenses and other recurring fees and then ask yourself, “Do we really use or need these services?” Determine which services are absolutely essential to run your business. The relevance of these items may have been pertinent at one time, but over time, their usefulness may have ebbed. When services come up for renewal, aggressively renegotiate terms. When negotiating terms for non-essential services, do not get locked into long term contracts.
3. Plan for cost reductions
Outline a comprehensive menu of cost-savings initiatives to be implemented in the event of a downturn. Prioritize initiatives within a scalable phased plan. A phased plan approach allows you to implement initiative based on the severity of the downturn. Stratify cost savings initiatives by functional areas including marketing, sales, charitable giving, discretionary capital investment and employee fringe benefits.
4. Review headcount
Human capital is a company’s most controllable expense. Evaluate the cost-benefit of your investment in human capital as if you are in an existing deteriorating environment. Objectively identify a hierarchy of talent that is most critical to retain. Prepare to request owners to forgo current salary, bonuses and draws to retain key non-owner personnel. Require owners to develop a personal economic downturn plan in the event of a reduction in owner compensation.
5. Free up unused and under-performing assets
Capital-intensive and diverse companies often have underperforming assets that can be sold to stave off losses, reduce debt and generate liquidity and working capital. Start by categorizing the company’s assets into categories — high-performing versus under-performing, strategic versus nonstrategic, essential versus non-essential. Consider the timing and financial impact of asset sales, and strategize the need for such sales as signs of different economic scenarios appear. Timing can be a critical factor as it makes little sense to sell assets once the market is depressed and resale prices have tanked. Lastly, consider long-term lease arrangements with exit clauses enabling the company to quickly divest itself of equipment and free up cash.
6. Communications plan
No news does not necessarily mean good news. Customers, employees, owners, lenders, creditors and other key stakeholders fear the unknown. In times of economic uncertainty, keeping stakeholders informed is critical. Routine and open communication is vital to preserving trust and maintaining morale. Share your relevant aspects of the impact of a downturn and outline your plan for addressing the situation. Develop a plan to routinely communicate industry and organizational metrics to your employees. Keep in mind a systematic approach to addressing deteriorating economic conditions will bolster their faith in company leadership.
How to implement
Implement a dashboard containing key metrics to be evaluated against specified company targets. Such metrics may include net operating margin, net operating income, variance from project budget and balance sheet ratios. Triggers in the dashboard should drive implementation of scalable elements of the plan.
Any contingency plan must be a living, breathing document. Periodically review the plan on a regular basis to ensure it remains relevant to your changing business and adapt accordingly – in good times and bad.
About the author: Rob Nowak is a tax partner with Baker Tilly, specializing in work with construction companies. He has experience in the technical areas of partnership taxation, taxation of closely held corporations and mergers and acquisitions. Rob can be reached at email@example.com.