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Crisis Strategy
World economy is in deep crisis. The future is scary and nobody knows when and how it is going to end. Unfortunately, there is no sign that the crisis will end soon. Firms have to at least survive that crisis if not use it to their advantage. First of all firms have to focus on activities which will allow them to avoid disaster. A response to economic crisis has to be well organized, any uncoordinated panic moves may result in more damage than good. To make things worse they will scare employees and make them think that there is no skipper on the ship. Two factors appear to be the most important in our fight to overcome the crisis: liquidity and updated business model which will allow us to protect our revenue and use our resources most effectively.
Liquidity
Liquidity is the most important factor in business survival any time, but at the time of economic crisis it becomes to be or not to be of any firm. Even the most impressive profit on paper will not help us settle our liabilities. Cash flow statement is the key report we should be analyzing and monitoring most carefully. It is the cash flow statement. The company cash is locked in accounts receivable and inventories. The better payment terms we give to our customers the less cash we have to our disposal. The bigger the difference between the payment terms we give to our customers and the payment terms given to us by our suppliers the more severe is the cash shortage. Crisis is the time when we have to make sure that all the customers we credit are really worth it. We have to review the customer segmentation based on credit worthiness. Tight the accounts receivable control. Avoid granting trade credit to high risk customers or customers which are not strategically important to the company. Be very careful with your valuable customers who are undergoing temporary financial difficulties. Work out a partner relationship with them rather than cut them off. It will be mutually beneficial. It is the easiest thing under the sun to get rid of a customer. It is very difficult to get a customer.
We have to tight control over the inventories and manufacturing. The production process can only produce as much as we are able to sell on the market. Review sourcing process. Try to intensify turnover, the shorter the time from material purchase to sales the less cash is locked in the process. Analyze all inventories and optimize all logistic processes.
Review all your liabilities, contracts, projects. What was acceptable at the time of prosperity may no longer be justifiable. Some of our initiatives and projects may probably be put on shelf without doing damage to our present or future business. Try to negotiate longer payment terms with our suppliers. Remember, they need cash just like we do, but, at the same time, they need to protect their revenue. It makes them more flexible.
We have to cut costs, but wisely. Let’s analyze our business model and decide what is the most important for the model to work. If, at the time of prosperity we created functions or positions which do not add value and are not necessary for the operations to work properly we have to cut them. Do not follow, however, most popular recession trend – cut 10, 15 percent of the workforce. It is easy to loose good, loyal employees but it is very difficult and time consuming to recruit and develop them. Business success is always very much dependent on employee quality and loyalty. Try to find a solution which would allow you to cut cost and retain valuable employees at the same time.
Protect your revenue and think about the future
Critically review your present model. What are our weaknesses? Do we know weaknesses of our competitors? We should try to eliminate our weaknesses and use competitors’ weaknesses to our advantage. Does the present model still fit the market and ensures that your revenue is the most you can get under the circumstances? Up to date business model gives the company a chance to protect its revenue and rationalize cost structure.
We cannot lose any valuable customer. Tighten control over customer retention and make sure that your, broadly speaking, customer service works perfectly. Optimize your processes so they work without defect. Remember, any mistake or delay in delivery or response may result in a customer loss.
Match your resources with activities required by your business model. Do not cut activities which will bring future benefits. Realocate your resources to where they may be used most effectively. Marketing costs are the obvious subject of cost cutting. As these are variable cost, they are the easiest to be reduced. However, this is a very shortsighted approach. Obviously, the marketing costs need revision and matching with strategic priorities. Some of the programs may be obsolete or not justified in present situation. Any changes to marketing expenses, as a matter of fact to all expenses, should be governed by strategic priorities and future developments.
Do not look back, look forward. Analyze the market and all opportunities. Crisis is often a great chance to grow business or put foundation under the future growth.