economic downturn

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6 Questions to Ask Yourself to Face Your Business’s Harsh Reality, Part 3

For the last two weeks we’ve been discussing the questions you should ask yourself to confront your business’s harsh reality. Read about Part 1 HERE and Part 2 HERE. This week, we’re going to ask ourselves the next two questions your should be asking.

5. Am I protecting the financial integrity of my company during downturns so that I am prepared to profit during better times?

Bad financial times prompt too many managers to take the turtle mentality. Don’t put your head in your shell until things turn up. Take the opportunity to see what is inefficient in your business by eliminating loss leaders and reducing inventory, and increasing marketing and sales expenses in high profit-margin areas. By shoring up problem areas during a downturn, you prepare your company to run lean and mean at all times.

This is not an excuse to avoid monitoring, evolving and preparing during good times, though. Many companies ride the wave of what’s working and worry about problems after the wave crashes on the shore. That’s the wrong approach. As long as you know it’s a wave, you know it will end. Come smoothly onto the shore, long since ready for the next wave. Companies that ignored this advice (not that they asked me) were satellite TV companies and Blockbuster. They both road their waves until they crashed into the shores of cable television and Netflix.

Speaking of crashing, if all of your assets and capital are invested in one area, and a problem occurs, operations will grind to a halt. If you have a Big Gorilla – one client, customer or product that accounts for 25% of more of your sales – you need to rethink what you’re doing. Along these lines, don’t bet the ranch on other opportunities; remain grounded in your decision making. In our experience, Big Gorillas are one of the top five reasons companies experience crises.

As above, consider the advantages of protecting your company’s financial integrity for more profitable times. There are always competitors who have issues, and if you keep cash or credit lines available then you can take advantage of someone else’s mistakes, acquiring new product lines or growing old ones.

6. Do our financial departments have sufficient controls and a fraud awareness policy?

75% of the fraud I discover is from first time offenders. That means the people who ultimately commit the fraud are not those who will come up in criminal background checks. Therefore, when working with your auditor, integrate sufficient checks and balances.

As the CEO you have to have a constant feel for your business financially. Walk the company and manufacturing floors – be hands on. Don’t let your guard down by taking your tie off and lounging in your office. Stay involved.

I once had a BBQ at 1 a.m. for a production crew at a company that ran 24/7. While doing this I discovered a multi-million dollar fraud. Do what would be considered out of the ordinary, and you never know what you’ll find.

One thing I recommend without exception is making your CFO/Controller take a two week vacation once a year. Don’t even let him in the building. Sit at his desk, or have someone else do it, and see what happens. You’ll be surprised every time as you find duplicate expenses, continued payment on cancelled leases or sold equipment, and perhaps personnel that don’t exist.

Conclusion

I hope these 3 posts about the 6 Questions to Ask Yourself to Confront the Harsh Reality of Your Business have been helpful. I’d love to know the answers to any of them if you care to share or questions that you would add to the list and that help you confront your harsh reality. Please share in the comments section below.

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6 Questions to Ask Yourself to Face Your Business’s Harsh Reality, Part 1

Over the course of the next few weeks we’ll be fleshing out 6 questions that every business leader should be regularly asking himself or herself.

These questions will help you to confront the harsh realities that all businesses and their owners face, thereby allowing you to protect and grow your business more safely, efficiently and profitably.

1. Am I adjusting to the New Norm or am I being complacent with business as usual?

The New Norm, as you may have heard, is the result of the downturn in the economy in the last 3 years. Some pundits predict a flat economy for as much as 3-7 years as we absorb severe decline in real estate value, credit card debt, unemployment, high energy costs, foreclosures and more. As the leader of your company, it’s your job to adjust your business accordingly.

In order to avoid complacency and being lulled into a false sense of security, take concrete steps towards streamlining your business to operate most profitably. Consider fewer fixed assets and more variable ones. For instance, leased or rented assets, instead of purchased ones, can make your business more flexible. On the other hand, if you can take advantage of competitors’ mistakes by acquiring equipment or inventory for $.20 on the dollar or of the tremendous amount of excess rental, warehouse and manufacturing space all over the country, this might be a great opportunity to do so.

As you think about these issues, consider your business plan and model. Should it be updated based on the New Norm? The answer to this isn’t always “yes” but it does deserve consideration.

2. Am I leveraging my banking relationship to enhance my business’s future?

Know your banker, and be prepared to call on him during difficult times. Establish credit by borrowing and repaying loans consistently, even when you don’t need the money. This way, you’ll avoid having to establish a new banking relationship or credit when you really do need a loan. In addition, it reflects well on your character to establish this credit, inducing your banker to work with you.

Don’t borrow to supplement negative cash flow. Borrow to facilitate operational needs and to establish your credit. The money from a loan could help you take advantage of a great opportunity, like acquiring equipment at a low multiple, or taking advantage of and buying out a failing competitor.

Just make sure to leverage your banking relationship now for banking issues that occur in the future.

Next Wednesday we’ll talk about the next 2 Questions we should be asking ourselves in order to face the harsh realities of our business’s situation. I’d love it if you shared the kinds of questions you ask yourself about your business in the comments below. Read Part 3 HERE.