On October 11, 2007 I wrote an article in which I suggested that the recession could be far worse than many people believed and that the impact on the stock exchange, the economic climate, economic vitality and inflation could be significant. I updated it November 30th when I realized that the stresses which were evident in October had grown more severe which 2008 may be an extremely rough ride. Now it is clear the economy is slowing dramatically and several observers believe we’re headed into, or may already be in, a recession. Now you ask , no more when the economy is going to be slow in 2008, but exactly how slow will it get.
The loan crunch has lost its crisis atmosphere however, many sectors from the credit markets remain paralyzed. We all know concerning the impact on housing and related industries. But many individuals are only starting to know how the paralysis is affecting consumers in areas other than real estate. Nowhere is this understanding more apparent than in the performance of the equity markets in the last two weeks where traders who blindly ignored the indicators for months suddenly see that the party ended earlier.
Declining home values have siphoned off a lot more than $1 trillion of consumer purchasing power at any given time when rising food and energy prices are devouring family budgets. Headline inflation, not “core” inflation but the real inflation you are feeling inside your pocketbook, is approaching 4.0% and if you simply take a look at food, energy, education and healthcare it’s higher. Unemployment reaches a 2 year high of 5% and heading higher. The house equity ATM is broken and consumer confidence is at a two-year low.
Consequently, retail sales are down across the board. Many major retailers reported declines in December sales with only Wal-Mart reporting an increase. November and December retail sales taken together were up only 1.7%, the weakest holiday showing since 2002[1]. Sales of all things from cars to clothing to hamburgers to lattes are down and declining. Rising to levels not seen because the 2001 recession are foreclosures and delinquencies on charge cards, automobile financing, home improvement loans and home equity loans[2]. Banks are adding to reserves and cutting back on lending. The American consumer is clearly under increasing economic stress and is nervous concerning the economic outlook.
The Fed has stated it is prepared to cut interest rates aggressively to safeguard the economy[3]. Lower rates might help but they are unlikely to stimulate consumers to begin shopping again. That is because the customer is simply tapped out under the strain of high food, energy and health care costs. The house equity ATM has run out of cash meaning the consumer can’t borrow to spend. It appears those that can spend won’t because of economic concerns. And no appear the Fed does with interest rates the banks simply won’t make new loans if reserve requirements increase and capital is impaired due to accelerating credit losses. When banks increase reserves for past loans they stop making new loans.
Officially the Fed has yet to concede that people are headed for a recession. Chairman Bernanke still speaks in terms of slow growth in the first half but accelerating in the second half or 2008. But clearly there’s increasing concern in the Fed and among many private sector economists. Some private sector economists are forecasting a short, shallow recession while some still think we’re already in a single. An increasing minority think we are in or headed for a long, deep recession as a result of the unnecessary levels of government, institutional and individual debt accumulated over the past six years.
Time will inform. But if the first is attempting to predict the near future you should consider that ever since the debt crisis broke in July 2007, the Fed, Wall Street and most private economists have underestimated the impact from the subprime mortgage crisis on:
The non-subprime sectors of the credit markets
Losses at financial institutions (losses continue to be underestimated)
The housing recession
The availability of credit to consumers
Consumers’ ability and willingness to invest
The overall economy
Probably the economists missed the mark because of optimism. Perhaps Fed officials didn’t wish to publically express their real opinions for fear of creating a recession. Probably the bankers didn’t want to admit towards the scope of the losses hoping that markets would correct themselves. Or perhaps no experts who are immersed in charts and numbers could accurately interpret what they were seeing as this particular mixture of stresses throughout the economy is unprecedented. What’s clear in my experience is the fact that few of these experts rose towards the 30,000 foot level in order to construct a logical advancement of past and future events.
OK, what exactly does all this mean for the business owner or CEO? It means that even when your company hasn’t yet experienced a slowdown, it likely will and soon. It means you ought to be open to the chance that an economic downturn could be far worse and longer than the prevailing consensus opinion. Also it means you need to give consideration to how a protracted recession would impact your business and you skill now to mitigate downside risk. I believe there are seven things a company can do before and through a difficult business environment to improve the likelihood of coming out the other side a stronger competitor.
Seven Steps to Surviving the current recession
1) Be a Leader – You might be the boss, but i am not saying everybody is going to automatically follow your lead. Throughout a down cycle individuals are going to consider their parochial interests a lot more than at any other time. That means decisions can be created or actions taken which are perceived to be of private benefit but may be of detriment towards the company. Your challenge is to get everyone to understand their parochial interests are one and also the same as the business’s interests. That means getting them to believe they’re one team and act accordingly. Additionally, it implies that you have to be the leader, not just the boss.
Which should ‘t be difficult to do. Most people are already seeking to you for guidance, inspiration and reassurance. You just need to be approachable, encouraging and prepared to listen – to anybody. You need to spend time in each and every area of the organization interacting with employees whatsoever levels. You need to be viewed as being human. You have to maintain a confident, positive attitude. That positive attitude is going to be infectious not just with key lieutenants but additionally with the rank and file, customers, vendors, creditors and investors. Employees that believe they are a significant part of the team, their contribution is noticed and appreciated which their leader has everything in check are happier, feel safer, tight on stress and are more productive.
When you take that positive, confident, “everything is under control” attitude out in public, other important stakeholders will also notice and become comforted. Customers and vendors may have more confidence supplying and buying from you. Creditors will be more cooperative and fewer intrusive. And investors will need less stroking. In troubled times the significance of as being a confident, positive leader and not simply the boss can’t be over stated.
2) Hope all went well but plan for the worst – Plan how you will react to a protracted downturn. If you listen to it by ear you’ll be slow to respond to rapidly changing conditions and will likely get some things wrong. Your plan should think that 2008 is a very rough ride with intense competitive pressures. You need to examine every factor of your business and make a detailed financial plan and cash budget. Once you develop your plan, do scenario analysis with various revenue and gross margin assumptions. Attempt to imagine a worst case scenario and then suggest it worse even still. Remember, the regulators and most economists have consistently underestimated how bad things might get.
Develop pricing and marketing strategies under different economic assumptions. Determine in advance whether you should emphasize volume in the expense of gross margins, or protect your pricing structure at the cost of volume. Examine the effects of growing or decreasing your marketing expense.
Examine your range of products and services. Determine which ones have the highest gross margin, use the least amount of working capital and require least amount of overhead. You may want to shrink to some core products or services.
Know in advance how you could reorganize to reduce cost within an economy that has shifted from growth to contraction. Especially take a look at those functions that impact G&A expense.
Focus on cash instead of profit. That isn’t to say that profit should be ignored, that cash is king in a down cycle. Examine the financial impact of deferring or accelerating planned capital expenditures. If a planned capital expenditure improves productivity or eliminates expense it might make sense to go forward with it. Merely a detailed financial analysis will tell you.
3) Listen to your people – The employees are the best source of information about things happening inside your industry and the mood within the company. Speak with them directly without their supervisors present so the information you receive is not filtered. Seek their ideas about how exactly operations could be improved, sales increased or expenses reduced. Hold impromptu meetings with the supervisors and get them exactly the same questions. If you are encompassed by a management team do the same with them. Search for discrepancies or inconsistencies in the information you receive.
Determine who are your most productive and versatile employees. Look for those that can take on more responsibilities if you want to cut. Look for troublemakers, complainers and outspokenly negative people. They are bad apples that can poison what is otherwise a positive atmosphere and lead to morale problems. Be proactive in removing the bad apples and underperformers. Should you wouldn’t bring in help again, find a way to make them go away. Plenty of high quality people will be looking for jobs.
Finally, be generous inside your praise and publically recognize those employees who’re doing a congrats. Employees will normally go that step further when they feel they are appreciated along with a couple of theater tickets or perhaps a dinner by helping cover their the spouse can generate lots of goodwill.
4) Know your customers and vendors – Be customer centric. The entire company should have customer satisfaction as its number 1 mantra. Do not scrimp on customer support. Not only do you need customer goodwill however, you need to understand customer problems. Get as close to your customers as you possibly can. Nothing can hurt you more than a customer that can’t or won’t pay. Ask profits staff to report regularly on their customers, though realize that this really is filtered information. Ask your people in customer service, collections and shipping to inform you when they hear negative rumors about any customer. Look at you’re A/R aging daily. Dedicate someone to contact any customer about the first day it’s delinquent and daily next. Don’t be afraid to put a customer on COD. If an account becomes 3 months overdue, offer a discount for prompt payment then put the account on COD. If receiving payment looks like a genuine problem obtain a collection agency onto it.
If anything can hurt you over a customer who can’t pay it may be a vendor that can’t deliver. Just as with customers, try to know the financial health of key vendors. Run regular credit report checks. Pay attention to what your industry sources are saying. Ask the people in A/P and shipping to inform you when they hear negative rumors about any vendor. Seek back-up vendors for key parts and components. You may not obtain the best price if you use multiple vendors but it’s much better than getting your supply suddenly cut off. Finally, it comes with an saying that “fast pay makes fast friends”. You might need your vendor goodwill so try to pay invoices promptly.
5) Get lean and mean, but don’t be shortsighted – Inside a steep down cycle every penny saved is truly anything earned. Cash absolutely is king so you must try looking in every corner from the business for methods to save money. Start at the end of the organization and look for methods to be efficient. Come up to the very best to check out in whatever way that you can save.
Begin with the warehouse, shipping and receiving. Is there waste or redundancy in these functions? Are shipping costs being passed on to customers therefore are they being marked up? If you are not charging your customers for shipping are you while using most affordable shipping alternative? Does Receiving have the purchase order information it requires at that time goods arrive? If not there’s waste. Are received goods entered within the system and put into inventory immediately so they are available for sale? If not there’s inefficiency and in all likelihood excess inventory. Does Receiving notify A/P on time after goods arrive and therefore are inspected? Would be the appropriate controls in position to avoid shrinkage?
Look at purchasing procedures. Is purchasing centralized? Exist written purchasing policies and controls? Who constitutes a purchasing decision so when? Are inventory purchases governed by inventory controls? Who authorizes purchases of office supplies? Have you been buying stuff that employees want or things that employees need. Does Purchasing send copies of purchase orders to A/P and Receiving on time? In many companies a lot of money gets wasted in Purchasing during the happy times. Actually, it is probably the most abused functions within the company.
Review your vehicle expense. Do you provide vehicles for company business? Are the ones vehicles being used for apart from company business? Perform the users keep mileage logs? Have you got company gasoline credit cards assigned to specific individuals and are they restricted as to what can be purchased? Are they restricted to specific vehicles so your customer service technician can’t fill up an individual vehicle? Does your vendor reporting distinguish between a can of oil and a cheeseburger? Would you reimburse mileage to employees who use personal vehicles on company business? Is it at the IRS authorized rate or perhaps a lower company rate? What kind of reporting do you require to substantiate the company miles? Does anyone a minimum of spot check to see if reported mileage looks reasonable? Vehicles can be a huge cost center for many companies also it doesn’t get much scrutiny during the good times.
Review your expense control procedures. Who is authorized to invest the business’s money? Do you have written expense reimbursement policies so when was the last time they were reviewed? How frequently are employees reimbursed for personal expenses on company business? If it is more than weekly you’re wasting lots of money. Ideally employees ought to be reimbursed coincident with payroll. What evidence is required to substantiate an expense? Do you follow IRS receipt guidelines? That’s probably OK throughout the good times but in a down cycle you might want to require receipts for smaller expenditures, or maybe even all expenditures. Who approves expense reports? It ought to be the employee’s direct supervisor plus an officer of the company.
Closely review your administrative and support expense. Look for positions that can be consolidated – two into one, three into two, four into three, etc. Find out if one administrative assistant supports more than one person. Take a look at departmental responsibilities to see if department consolidation could reduce staff. Review every form and report in the commercial to see which are redundant or unnecessary. Often you will discover some which are no more needed but are there just because they have been there. Find out who is getting reports that do not really should get them. Start a campaign to reduce the use of paper, ink along with other supplies at all levels.
Review internal policies, procedures and controls to see if they’re repetitive and efficient. Make certain they don’t create unnecessary work. Make sure your fungible assets are adequately controlled. This would include inventory, supplies and assets in storage. Make certain your check stock is kept under lock and key which use of bank accounts is restricted. It would be smart to have a senior lieutenant review every invoice prior to it being paid or if the volume is simply too heavy spot check them. Require dual signatures on checks over an amount that’s practical for the business.
