Downturns drive shifts in competitive position and industry structure. Those who stay ahead create the most value on the rebound. Companies with strong financial warning systems and a strong cash position can see problems fast and defend against them. Companies with robust scenario plans in place can act fast to cut back (if that’s needed) or charge ahead (when that’s possible).
What won’t work is the same-old, same-old planning and budgeting process. You need to act fast and set targets quickly; avoid analysis paralysis; prioritize progress over perfection, and focus on the 809/20 rule; bring everyone into the process; and be ready to change your tactics and strategy as the market and the economy dictate.
As executives and managers prepare, they should ask themselves—and each other--twelve questions about recession readiness.
VISIBILITY: STRENGTHEN YOUR FINANCIAL WARNING SYSTEM
- Are you tracking performance measures that give early warning of trouble, such as late payments, softness in orders, or increases in inventories?
- Are business-unit and P&L managers tracking cash flow, working capital, and other measures, not just revenues and costs?
- Have you created a recession readiness war-room to ensure that warning signs can be aggregated and analyzed across the company?
RESILIENCE: MAXIMIZE CASH GENERATION
- What working capital quick-win initiatives can help maximize/free up cash during an economic downturn?
- What fixed costs can you turn into variable costs (e.g., cloud and SaaS computing, renting instead of buying)?
- Have you identified labor-cost-saving options (e.g., outsourcing, using temps, freelancing?) and determined which could be appropriate for which tasks or processes?
OPTIONALITY: LAYOUT SCENARIOS
- Have you identified cost levers that you can pull in the event of a mild, a moderate, or a severe downturn?
- Have you established responsibility, accountability, and measurements to track the effectiveness of these actions?
- How will you ensure that some of the non-essential discretionary spend doesn’t creep back in and potentially erode realized savings?
ACTION: DON’T EXTRAPOLATE FROM LAST YEAR
- If you were building your organization from scratch, what activities (that you are now performing) would you eliminate or perform in a radically different way?
- How can you increase empowerment and accountability when building out a budget during economic uncertainty?
- How will you identify and act upon growth opportunities (e.g., bargain-basement acquisition opportunities)?
When tough times hit, some companies struggle or even die; some muddle through, and a few thrive. Which group you’re in isn’t a matter of luck. It’s a matter of how well you prepare and how determined you are to act on what you see.