People behave in contradictory ways during times of stress — like during a recession. Too many managers in too many companies become paralyzed by fear or indecision. Recessions are part of business cycles, just like growth periods. Thus, managing during a recession is part of a manager’s job — perhaps the most important part.
But what should managers do differently? The answer is “a lot,” but not “everything.” If, as a manager, you have managed through recessions before, you may remember what to do, assuming you did the right things. If not, consider this short story.
A man was walking along the street, and as he passed a construction zone, he fell in a deep hole, one with walls so steep he could not get out. He yelled for help.
The first passerby was a doctor, who asked if he was injured. After answering that nothing was broken but he hurt all over, he saw a prescription float into the hole and the doctor was gone.
The next passerby was a minister. The minister asked if the man was all right, and when the answer was a reluctant yes, a prayer on a slip of paper came floating into the hole.
The third passerby was the man’s best friend — and the man in the hole was jubilant — until his friend jumped into the hole with him.
The startled man asked his friend, “Why did you do that? Now we’re both in the hole.” The friend answered, “Yes, but I’ve been down here before and I know the way out!”
The man in the hole felt frightened because he hadn’t been through the experience before, and didn’t know how to get out — fear of the unknown was natural. If you haven’t been through a weakening economy before, you may think of yourself as the man in the hole.
The mere word “recession” triggers fear of the unknown. How bad will it get? How long with it last? What should we do? If these are your reactions, don’t feel bad. These fears are normal when facing unpleasant events of unknown severity and duration.
The biggest mistake you can make is to act too slowly, but it’s also important to act with carefully considered intent. The second biggest mistake is denial: “This can’t be happening; it can’t get any worse.” Yes, it is, it can, and it probably will. The third biggest mistake is to become defensive and reactive. When that happens, you will always be a step behind the competition — and a step late in meeting your customers’ needs.
The secret is not to concentrate on “survival.” Instead, concentrate on taking steps to dominate the competition. When the recession ends and recovery comes, you’ll be on top. Coincidentally, those same steps are the right moves to survive the recession, too.
Here are important steps to take when “preparing to dominate” the competition:
Attack! — By definition, a “recession” means negative growth, but that doesn’t mean there’s no business. There’s just less, and it takes more effort to capture it. That’s when “dominate” comes into play. If you read further down this list, you will know to choose the right customers, and push the right products. Get out there and get a larger share of the remaining business. Attack — don’t defend! Be proactive, not reactive!
Customers — Sort customers in descending order of your annual revenues and profits — also consider their potential. Get closer to the top customers and sell them more. Eliminate complexity added by bottom-dwelling customers; they cost more to keep than they yield in profits. There are some winners in the middle who need attention, and losers who need to go — now! Firing customers is always hard, but when the cost to serve them exceeds the profit they generate, money and time that could be used on better customers is wasted.
Products — Sort your products the same way, in descending order of annual revenue and profit. First, consider the items at the top. Where are they on the “product life cycle”? New and still growing, or old and declining? Which have plateaued (neither growing nor declining)? Those will decline next. Now is the time to “rejuvenate” them or drop them. Reduce the complexity drain of old, tired products — dump them and make room for new ones.
Expenses — Quit spending. Cut everything except truly essential expenses. Don’t cut spending on new products and marketing — those are your future. Get rid of all the nice-but-not-necessary company expenses — temps, contract services, memberships, subscriptions, high-priced travel, conventions, parties, FedEx, premium flights, expensive limos, hotels, and meals out.
Cash flow — Watch cash flow like a hawk. Make a spreadsheet (you should already have one) projecting cash flow 13+ weeks out, in detail. Collect fast, pay slow; take only the big cash discounts. Use checkbook-style, open-to-spend processes, starting with how much you have and then deducting items as you spend. Stop spending before cash runs out.
Headcount — After purchased materials, people are usually the largest cost in a business. People don’t just cost wages and benefits; they spend money and consume resources. Carefully evaluate your people. Sort them into four groups: A — Great — these are the keepers, and tell them so; B — Good — you want to keep them, and tell them, too; C — Fair — questionable; D — Weak — under-performing or unnecessary, and you should cut them now! Find the ones in the “Fair” group who can grow into “Good,” and work with them. Dump those who can’t grow or won’t grow, along with the “Weak” ones.
Note: These groupings have nothing to do with organizational rank — a “Great” customer service rep might be far more valuable than a “Fair” senior executive. Weak or unnecessary people in high paying positions should be cut first. Also, combine jobs to remove highly paid positions — CFO, treasurer and controller can often be combined into two jobs by reallocating work. Next, cut excess people who were added in “good times.”
Lower the breakeven — Classify expenses as “Fixed” or “Variable.” Variable costs (expenses) go into every product or service. Fixed costs are determined by decisions about the business’ structure and size. In a weak economy, expect volume to drop — this means you must cut fixed costs fast, and resize the business to the market. Pricing must recover variable costs, and contribute to covering fixed costs, SG&A (sales, general and administrative costs), interest, and hopefully yield a profit. (Note: Using EBITDA [Earnings Before Interest, Taxes, Depreciation and Amortization] as a metric is dangerous; it excludes interest — a cash outlay.)
Getting through a recession is like getting in shape after gaining weight. Exercise — make the right moves. Eat properly (“feast on competitors”) by selling the best products to the best customers. And don’t quit when the going gets hard. Running a business is supposed to be hard; if it weren’t, everybody would be doing it. Now get out there and don’t just survive — attack and dominate! It’s a lot more fun than the alternative.
