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Managing in a Down Economy

These solutions will help you be success


Economic Outlook: Overview - Finding Success in Challenging Times

After a prolonged period of growth, the global economy has finally taken a turn for the worse. At the time of this writing the economy report - or at least parts of it - have entered the down turn. We have the solutions for recovery!

A slightly more painful economic adjustment and a milder recovery. Despite the divergent outlooks, the downturn represents a time of opportunity for well-managed companies.


The current down-swing to an excess of corporate and consumer debt and over-leveraged companies that have caused a credit crunch within the banking industry. I believe the down-turn will unfold as more of a "sectional" correction, with mature manufacturing and high-tech industries taking the brunt of the blow.

To prepare your company for recessionary conditions, I recommend the following:



Set conservative budgets so you do not haemorrhage cash.


Build in as much financial liquidity as possible.


Work with your lenders to get as much credit as possible, striving to maintain a 10 percent margin for error with your financial covenants.


Prepare a comprehensive cash flow forecast that includes best and worst-case scenarios.


Scrutinise every job in the company to determine which ones are essential to the core business and which can be cut if needed

Take on board a Non-Executive Director who will share with you successful ways to stay in business


Once you have these defensive strategies in place, start thinking about how to position your business to take advantage of the next economic upturn. Despite this gloomier outlook on the recession, there is an opportunity for well-managed companies.


Without question, the economy has taken a turn for the worse, and it will last a while, but that's bad news only for the companies that are ill prepared to handle it. We have an excellent publication, `Recession-Busting Solutions` to guide you through this stage of global balancing. Comprehensive details on http://www.cavendish-mr.org.uk

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Understanding Economic Cycles


Every economic cycle consists of four distinct phases:



Phase A (Advancing). In phase A, the economy has hit bottom and is just beginning to come out of a recession. Trend data for sales, orders, inventory, etc., continues to look dismal (and may still be trending downward) but leading indicators point to a recovery in the near future. During this phase, companies should shed their defensive tactics and begin ramping up for the recovery.



Phase B (Best). During this phase, the economy runs progressively higher than the previous year and trend data climbs at a sharp rate. Companies should take risks, budget for prosperity, implement aggressive expansion programs that were planned and staffed for during phase A, and roll out new products and services.



Phase C (Cautionary). In phase C, the economy begins to weaken but hasn't turned overtly negative. At most companies, performance continues to run above previous year levels, but growth gets harder to achieve. Instead of pursuing growth, companies should stop hiring, avoid long-term purchase commitments, tighten requirements for capital equipment expenditures, weed out inferior products and begin implementing cost-cutting measures.



Phase D (Danger). In this phase, the economy has turned overtly negative. Data trends have fallen below previous year levels and are actively declining for most businesses. Companies should manage for survival rather than growth, pay extra attention to cash flow, margins and key financial ratios, tighten up on accounts receivables, and adopt a defensive position vis-à-vis market and pricing pressures.


Taking advantage of economic downturns requires the ability to predict with reasonable accuracy when one phase will shift gears into the next. This can be accomplished by:



Conducting a 3/12 and 12/12 "rate of change analysis" for your company.


Comparing your company's rate of change to the economy as a whole.


Monitoring key macroeconomic indicators.


To conduct the rate of change analysis, use a spreadsheet to aggregate your sales data into separate three - and 12-month rolling totals. To determine your "3/12" rate of change, divide the most recent three months' sales total by the same three months from the previous year. The "12/12" ratio works in the same manner except it involves a rolling total for 12 months rather than three. Ratios above 100 generally indicate favourable economic conditions. However, the direction of the numbers tells you a lot more about where the economy is headed.


You can also get a reasonable idea of the economy's direction by tracking certain leading indicators. These include industrial production, the U.S./UK/European leading indicators, the money supply, the relationship between new orders and inventories, housing starts, after-tax, disposable income and retail sales.


Conduct a 3/12 and 12/12 rate of change analysis for each of these indicators and you'll have a pretty good idea of where the economy is headed, as with your own company, the direction and rate of change carries a lot more weight than the numbers themselves.


The recession (early phase D) will officially begin ( our predication) in the first quarter of 2009 and will likely continue through the middle of 2010. Phase late A/early B will occur in the middle quarters of 2010 and should signal the launch of another lengthy and very prosperous economic boom. Start laying plans now for how to take advantage of this upcoming macroeconomic expansion.


Preparing for the Downturn


Seven steps for preparing your company to ride out the economic storm:



Analyse the business. Put together a five-year financial history of the business and look for trends in key financial ratios. Search for signs of trouble within your industry, such as excess capacity, unreasonably low prices and erosion of the top line.


Create a worst-case cash flow forecast. Build a worst-case scenario that assumes a 10 to 20 percent drop in sales. Identify the level of operating cash needed to run the business and look at where you need to make cuts in order to ensure that the money going out doesn't exceed the money coming in.


Review the terms and conditions of your loan(s). Go over the terms and conditions of your bank loan, making sure you have plenty of room to remain in compliance with all the covenants. Strive for a 10 percent buffer on every covenant.


Identify internal weaknesses. Look at every aspect of the business to identify internal areas of weakness, including Directors/Managers, over-staffing, excess inventory, and too-liberal credit terms, increasingly ageing accounts receivables and declining quality standards.


Develop a contingency plan. This should include a combination of tactical and strategic planning that outlines specific action steps your company will take should sales and profits take a nosedive.


Write an opportunity-based business plan. Put together a business plan that describes not just how you will survive, but how you will thrive during the economic downturn. Use the plan to convince your bank to lend the money needed to acquire assets from financially troubled competitors.


Begin searching for acquisition opportunities within the industry. Pay special attention to competitors in financial trouble. However, wait until the economy hits bottom and prices become more realistic before implementing your acquisition strategy.
Acquiring Troubled Companies during an Economic Downturn


The process of acquiring troubled companies requires four basic steps:


Make sure your company has a solid financial foundation.


Identify the prey (targets for acquisition).


Get a "hunting license" (access to capital funds) from the bank.


Buy the assets of troubled companies.
To identify potential acquisition candidates:


Study the financial condition of your competitors.


Compare competitor information to industry statistics.


Find out who is accepting the unprofitable business you turn away.


Talk to your counterparts in competing companies.

Talk to your suppliers and customers.


In order to grow when everyone else is cutting price, you must have access to capital. This requires an opportunity-focused business plan that tells a compelling story. When approaching your bank for a "hunting license" (a line of credit that allows you to pursue acquisition opportunities):



Expect to pay a higher interest rate than you're used to.


Be prepared to provide specifics about the deal.


The bank will require a security interest in all the assets you intend to acquire.


The bank will want your personal guarantee.


Once you find a likely acquisition candidate, proceed with an in-depth analysis of the company.


When making a `bid` for assets, these can be acquired in four different ways-bulk sale, foreclosure transaction, and general assignment for the benefit of creditors. Each method has distinct advantages and disadvantages which must be assessed in relation to the specifics of the deal.


When buying assets from a troubled company, first look at the real value of the assets compared to how much you're paying for them. Then factor in the time it will take to complete the transaction, the level of risk from creditor claims and the costs of defending yourself against those claims. If the numbers look good, proceed with the transaction. If not, wait until a better opportunity comes along.


Extending Credit in a Down Economy


When the economy goes, most companies tighten up on credit approval. However, smart companies look for ways to use the credit function not only to retain current customers but to gain new ones as well. Managing the credit function during a down economy requires three steps:



Hold onto your current customers. To keep your customers from bolting to the competition, add more value by lowering the cost of doing business with you.


Reach out to new customers. Look for ways to accept new customers you would normally turn away. This doesn't mean extending credit to anyone who walks through the door. However, if you can find a way to minimise the risk and remain confident of payment, there's no reason not to extend credit.


Use "product value at the time of sale" to make credit decisions. If you have unused capacity (the ability to accept additional business without increasing fixed costs) and a high demand for your product, you can accept a higher level of bad debt and still make a profit.
Whether in good times or bad, the only reason to extend credit is to complete a sale you would otherwise lose, Never extend credit without a valid reason for doing so, especially during an economic downturn.


Stepping Up Accounts Receivable


During a soft economy, collecting on accounts receivables becomes more important than ever. A three-step process for collecting on delinquent accounts in a timely manner.



Understand why customers haven't paid. Past-due customers come in three categories:


Slow payers are good, stable customers who have the ability to pay. When they cut you a cheque, you know it will clear.


Problem payers have either systems or financial problems. Systems problems involve some glitch in the process (i.e., missing contracts or purchase orders, unused or misapplied credits, and lost paperwork) that prevents the customer from paying. Financial problems, which can be short- or long-term, occur when the customer doesn't have the money.


Avoidance payers deliberately try to avoid payment. Fortunately, they represent a very small percentage of delinquent accounts.


Close the "sale." Once you know what type of customer you're dealing with, you can take the appropriate steps to collect your money:
Contact the decision-maker. Start the conversation by saying, "Hello. I'm Joe Smith from ABC Company.


Our records show that invoice number 111 dated January 1 is still outstanding. Can you help me with this matter?" Then sit back and listen.


Determine the type of customer. Ask questions and listen closely. Their answers will tell you what type of customer you're dealing with.

Make your presentation based on the type. For slow payers, focus on getting the customer to pay you closer to the agreed upon terms of sale. For systems problem payers, identify any problems and fix them immediately. For financial temporary customers, express a willingness to work with them while selling them on the benefits of continuing to buy from you. Cut financial serious customers off at once or put them on C.O.D. only. Put avoidance payers on C.O.D. and send their account to a collection agency.

Close the "sale" and follow up. Get a firm commitment from the customer on when they will pay and then use a good contact management system to track the account.


Track your A/Rs on a daily basis. To make sure your people contact past-due customers in a timely manner, a daily A/R contact report that tracks four critical areas:



Who your A/R person calls each day


The outcome of each conversation


When you can expect payment from each delinquent customer


Whether or not customers have paid when they said they would
To facilitate your collection efforts:


Start early. Contact all delinquent accounts within three to five days of becoming overdue.

Call the largest accounts first. Go after the big $/£/e/etc first, then work your way down to the smaller accounts.


Keep a systems log to track systems problems. This makes it easier to collect your money while upgrading your business processes at the same time.


Get the ``right` person for the job. Hire outgoing people who enjoy interacting with others and talking on the phone.


Turnaround Time


Suppose reality exceeds your worst-case scenario and you find yourself in serious financial trouble-what happens then? First, ask, "How did we get here, how serious is the situation and how much time do we have?" Then implement the following 10-point plan for recovery:



Go into full crisis mode.


Protect and manage your cash flow.


Develop financial discipline.


Attack the gross margins.


Work with your bank and creditors.


Create a cost-control team.


Revise the organisational structure.


Protect your service and current accounts.


Focus on the core business.

Identify a new model for the business.


Once the immediate crisis has passed and the company has achieved a positive cash flow for the short-term, the next step involves practising ongoing financial discipline to achieve long-term profitability. This includes the following:



Strive to increase your cash buffer.


Tighten up on accounts receivable.


Reduce inventory.


Liquidate under-utilised assets.


Extend payables.


Track key balance sheet ratios.


Continually reforecast sales.


Keep a lid on cost of goods sold.


Tighten credit.


Ultimately, turnaround situations require intense focus from the person at the top. To keep things as simple as possible:



Control the cash.


Get very clear on your market differentiates.


Stay lean and mean.


Raise expectation levels.


Over-communicate with employees and customers.


More than ever, your people will be looking to you for guidance and direction, So take charge, act swiftly and decisively, and lead the way!

Business and domestic plans run side by side, so plan to be successful and take action today!



An excellent publication is `Recession - Busting Solutions`

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"Success is within you and the sky`s the limit. Have passion to learn and let the knowledge help you to be successful in business"

Colin Thompson

`Recession - Busting Solutions` by Colin Thompson

Contents of 316 pahttp://www.cavendish-mr.org.uk








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Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cashflow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM/Software/PDF and over 400 articles published on business and educational subjects worldwide. Plus, International Speaker, Visiting University Professor at the European Business School, Cambridge and Chairman of Oxford College of Management Studies.

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