Guidance from Gordon Stuart on Recession Tactics
It’s been dubbed ‘bigger than the Great Depression’ and daily news of redundancies and restructures highlight we’re in difficult times but we’ve weathered challenging economic situations before – so how can we learn from the past and prepare for the future?
Ten years ago, Harvard University published research into the way companies respond to economic crisis and how their actions ultimately determine shareholder value in the future. Covering three recessions – 1980, 1990 and 2000 – researchers found that 17% of the nearly 5000 businesses studied simply didn’t survive. Those that did survive were slow to recover and three years on from the recession hadn’t regained their pre-recession growth rates for sales and profits. Only a small number – 9% – flourished and the winners were not as expected. Those that won through adversity were those with a multi-faceted strategy able to master the delicate balance between selectively reducing costs to survive and investing for the future, spending on marketing, new assets, research and development.
Researchers classified the companies and their responses into four groups:
- Prevention-focused companies, which make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks.
- Promotion-focused companies, which invest more in offensive moves that provide upside benefits than their peers do.
- Pragmatic companies, which combine defensive and offensive moves.
- Progressive companies, which deploy the optimal combination of defence and offense.
Getting the balance right, being a ‘progressive company’ is a challenge we all face right now, particularly given the effects of recession are not felt for some time – for example, the depth of the 1987 recession was felt in 1991. So best practice means being prepared for the next waves as they come through.
So what does best practice look like? Here are some steps that can help:
- Continue monthly /quarterly rolling cashflow forecasts
- Preserve liquidity so you have two to three months working capital
- Regularly forecast sales so you can identify trigger points for actions
- Use a financial model to calculate
- Sales by category or division
- Gross margin before labour by same
- Direct and indirect Labour
- Your breakeven under a best / worst / likely scenarios.
- Note your breakeven can be quickly adjusted to a percentage of sales e.g. 10% target.
The model below determines your monthly salary cap. Determining your salary cap is the best way to achieve your required labour productivity and, for simplicity of explanation, I have used an annual example.
- Assume revenue of $1 million and a net profit goal of 10% or $100,000
- Assume also, we have non-salary costs (costs of goods sold $200,000 and overheads of $200,000) i.e. a total of $400,000.
- We can now determine a salary cap of $500,000 in order to still achieve our net profit goal of $100,000 or 10% at this revenue.
- It doesn’t matter if your employees are part-time or full-time. You have a $500,000 salary cap. It doesn’t matter if you give incentive pay or hourly pay. The sum of all salaries & wages at the end of the year cannot exceed $500,000. It’s no more complex than that. On a monthly basis, this is $41,666.67.
Being able to respond to economic challenges takes some flexibility – for some years now, agile working has been signaled as a good way to operate but what does that mean for day-to-day operations? For the most part, it means continually reassessing your position – what matters most? Next, stay vigilant, inspect and take stock of your numbers. Work on your strategy – what choices are there, how can you improve your value proposition, what will you do to inspire your team? Finally – agile means getting on with the job. Executing and implementing the plan as you adjust it and often this is the hardest piece of the puzzle.
We may find ourselves in a great recession but with some forward thinking, agility and an adherence to best practice it is possible to come out the other side and flourish.
With 28 years of international business experience, Gordon has been involved in many of NZ’s largest takeovers and is well versed in due diligence, valuation, project management and finance, and the need for good corporate governance. You can contact Gordon on 027 262 9596, [email protected] or connect with him on LinkedIn.