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Planning in time of uncertainty
In the past weeks we have witnessed a period of unprecedented economic turbulence and instability. Of course this uncertainty is not just affecting us here in the U.K., but in a globalised economy it is affecting people right across the world. Years of consistent economic growth have given way to rising unemployment, increased costs, reduced disposable income and a greater number of risks. In this short article, I will describe some courses of action that may help to reduce the sense of helplessness businesses are currently experiencing.
The global credit crunch and the increased uncertainty affect almost everyone. Very few UK businesses are immune to the effects of reduced credit, devaluing housing stock and the greater perceived risk we all feel. These are clearly very difficult times and potential solutions are occupying the minds of economists, bankers and ministers alike. Hence it is important to stay abreast of developments to ensure that management decisions are made in the context of the most up-to-date economic indicators and forecasts.
2. Revisit your business plan
It is perfectly acceptable to revise your business plan more frequently than once a year. If you have not done so for some time, it is worth revisiting it now. Business plans are written with certain assumptions built-in and these assumptions are context sensitive. If your business plan is over 6 months old, then it is likely that you will need to revise revenue figures downwards and costs upwards. Do this as soon as you can, and revisit key indicators such as current cash burn rates, debtor days etc. An up-to-date business plan can help ensure everyone is aligned towards the strategic goal of the company; ensure the cash flow is monitored and that the impact of changing assumptions is reflected in the numbers.
3. Review current projects and plans
Most businesses have a number of projects and initiatives on the go at any one time. These projects will consume resources over a number of months and years, and will typically involvement investment of time, people and money. The end goal of the completed project will often be designed to help your company generate additional revenue streams or to protect current streams. Again projects that have been planned over 6 months ago, and that take a number of months to complete should be reappraised. It may be more appropriate to defer projects or put them on hold until the economic conditions are more favourable or until the level of perceived risk and uncertainty declines. Any new contracts with third parties need to have additional safe guards built-in. For example, if exchange rates move outside certain agreed bands, it would trigger a renegotiation of the terms or an option to break the agreement etc
4. Communicate Effectively
It is not just management that feel the pinch when economic conditions deteriorate. It is likely some employees may be saddled with credit card debt, or may be sitting on properties with negative equity and may be worried about their futures. Management need to ensure their employees are aware of issues with implications for them. It is also important that employees are fully aware of the wider context so that any legitimate change initiatives designed to reduce costs are accepted rather than resisted.
5. Consider outsourcing some activities
In most industries it is possible to outsource non-core activities. There are many pro’s and con’s for outsourcing, however, if cash flows are under pressure, the inherent flexibility of outsourcing may be more appropriate until economic conditions improve.
6. Assess exposure to known risks and dependencies
In times of uncertainty it is important to step back and identify risks and to appraise key relationships. Is the company over-reliant on one particular company or industry? While this reliance may have been fine in periods of economic growth, it is important to recognise that a dependency on one supplier or customer dramatically increases the risk. Any vulnerability in one particular industry sector can lead to knock-on effects in the most unexpected of places (as well as in the more obvious areas). A diversification strategy can help to mitigate against an over-reliance on one supplier or customer.
7. Consider Scenarios
The importance of scenario planning grows when uncertainty increases. Scenario planning consists of management considering a range of plausible future outcomes ranging from a ‘small stretch of the imagination’ to the ‘outlandish’. The aim is to think through the implications for the company if certain scenarios came into effect. So for example what would happen if sales decline by 20% or if oil doubled in price in 2009? By thinking through a number of plausible scenarios, and designing strategies to deal with such eventualities, companies will be better prepared if indeed one of the scenarios does in fact occur.
8. Continue to Innovate
While it may be tempting to ‘tighten up’ it is important to recognise that increased uncertainty also brings opportunity. If competitive brands reduce marketing spend, it may be an opportunity for you to grow brand awareness. Similarly as companies advertise less, rate cards typically drop so it becomes cheaper to communicate with potential customers. Tougher conditions may force you to assess ways to reduce costs across your value chain or to innovate so as to reduce the cost of your product or services. Others such as Michael O’Leary, CEO of Ryanair see the recession as an opportunity:
“We are the perfect airline for the recession. You don’t want to waste any money at the moment on overpriced flights that will be delayed out of Heathrow while your bags are lost.”
9. Don’t assume cost cutting is a panacea
Another common reaction to a downturn is to reduce costs through trimming wage bills by making employees redundant and cutting back on marketing activities. While reducing these costs may have a short-term effect on the P&L, they are not without their risks. Redundancies typically have a negative effect on the remaining employees that now feel less secure about their jobs, and are not happy with the extra burden placed on them with a reduced headcount performing the same activities. That said, downturns can legitimately be used to exit serial underperformers.
10. Keep an eye on the cash.
Given the ubiquitous impact of the credit crunch, it is likely that the cash positions of some customers will have deteriorated. If a majority of sales are on credit, it will be necessary to manage Invoices, and accounts receivables (debtors) to ensure that your cash position does not suffer also. Keep an eye to ensure your ‘debtor’s days’ figure does not creep up i.e. the amount of days on average it takes to get paid for a credit sale. A strong cash position is what you need to aim for.
The increased uncertainty in our environment means that planning for the future has become more difficult. However, it is how we deal with this extra risk will determine how our businesses fare over the coming months and years. This article prescribes a number of remedies, such as enhancing our awareness of the risks we face, updating our business plans and considering various plausible future scenarios so we can manage the risks a little better. It is not a time for ‘battening down the hatches’, but rather a time for more planning and better planning!
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