Business survival or success doesn’t happen by accident. Careful planning is required to minimise overheads, maximise profits and ensure the business flourishes.
Directors of businesses up and down the country are currently looking at what they need to do to ride out the economic storm. The mindset should be how to become stronger in the face of hardship.
“A recession upsets the commercial status quo and previous thinking on what is good for business is thrown upside down. Those people who can grasp the changes more quickly and take advantage of the new business landscape will be the ones who will succeed,” says David Blacher, partner at Baker Tilly.
One of the ways to learn to make the right decisions is by studying the wrong decisions. Recessions are not a new phenomenon, and so it’s a valuable exercise to analyse the most common mistakes made in the past. Here is a selection of the most common mistakes:
Delayed cost cutting
‘Too little too late’, is an old adage which accurately describes the failure by companies to reduce costs quickly enough to allow the company to receive maximum benefit. You need to look strategically at costs and assess them as investments – what benefits am I getting in the short, medium and long term and which costs are not essential to my business? “Be decisive early on and reap the financial savings over the longer term. Your competitors will already be cutting costs and will be reaping the advantages,” says Simon Hart, partner at Baker Tilly.
Resist the temptation to cut training and marketing budgets as this will reduce your ability to attract new business and respond to a business upturn.
Failure to face reality
Entrepreneurs are naturally optimistic but it can quickly become a weakness. Make sure you realistically stick to the facts and don’t convince yourself things are better than they are. Too many people avoid making difficult decisions until the consequences of procrastination are forced on them.
While it’s important to face up to reality it’s also important not to panic. “Don’t get depressed about the general news. It’s all about you and your business and the decisions you need to make. The road ahead is difficult but it’s not all doom and gloom,” says David Blacher, partner at Baker Tilly.
The war for talent
We have all heard of companies offering voluntary redundancy packages. It sounds like a fair way of reducing the head count but is it the best way to retain your brightest talent? Those people who think they will quickly be able to get another job elsewhere are likely to take up the offer and then you are left with people who are less able.
Many businesses cut too many jobs, particularly skilled ones in the previous recession and then found that they were exposed when demand returned. Clever companies use a recession to pick up bright, talented staff which have been made redundant from other companies. It’s a great opportunity to recruit staff that normally would be outside your reach. Respondents to our Financial Directors’ Survey conducted in April 2009 highlighted that better people can be hired for less money in a recession.
Working vs planning
Business leaders often believe that ‘rolling up their sleeves’ to help the workforce is leading by example. But this means that the best qualified person to plan a new strategy for the company can be distracted and fails to see the bigger picture. A recession requires a new way of thinking and so you need to allocate more time for planning rather than less. “Surviving the recession will be a journey. Make lots of small changes, one step at a time,” says David Blacher.
Technology
Technology can be an expensive commodity and in a tough business climate it’s very tempting to make do with your existing infrastructure. But in this technological age the effect on your business can be extremely detrimental and may shift extra costs onto other areas of the business as well as reducing efficiency. So the answer is to carefully evaluate new technology as it could make you some cost savings.
If you are looking to upgrade your systems look for leasing options to preserve your cash.
Reducing risk
Sometimes you need to take risks in order for your business to expand. It’s very easy in a recession to say that you are keeping risks to the minimum in order to survive. Innovation requires taking chances and dealing with failure. Recessions push managers to be more conservative. Try and resist the temptation.
Stop new product development
Saving money often means cutting back on new products and services during an economic downturn. This hurts companies when economic growth returns and they have a less compelling offer in the marketplace to attract customers.
Companies retreat from international expansion
More companies are recognising the need to expand their business on an international basis. It's expensive to expand globally and managers often save money by cutting back on emerging markets. This is a big mistake. Emerging markets are sources of new revenue, business models and talent.
A quarter of respondents to our Owner Managed Business Survey expanded abroad in the past three years while 21% plan to do so in the next three years.
“We need to look at emerging markets and focus on increasing sales in those countries as there is limited scope for domestic growth at the moment,” said an operations director from a technology and telecoms company.
“More and more businesses will shackle themselves if they are not prepared to look abroad for business opportunities,” said David Blacher, a partner at Baker Tilly.
Performance metrics have changed
To save money and cut costs, managers shift their planning away from rewarding riskier new projects towards sustaining safer older goals. Risk-averse behaviour follows.
“There are three ways to grow your business: sell more, lose less business than your competitors and be different. It’s tempting to play safe but the rewards will be there for those companies who expand into new business areas,” says David Blacher, partner Baker Tilly.
Hierarchy is reinforced
Sudden drops in revenue and profit often lead companies to panic and take hasty action to stem the decline. The need for fast decision-making often leads to a return to tightly controlled management style. This alienates creative employees and stops the evolution of the company organisation towards a collaborative, flat and open structure.
Retreat behind the walls of your castle
Cutting back on outside consultancies is seen as a quick way to save money. Yet one of the key ways of introducing change into business culture is to bring in outside advice. They know what companies across a broad range of industries around the world are doing to promote change. Not receiving this information can hurt a company's global competitive position.