Taking action Featured

11:27am EDT February 28, 2006
Turbulent economic times were an unavoidable reality in 2005. What can businesses do to face economic challenges this year?

Some basic business points are important for all businesses. These critical points are:

  • Strategic planning

  • Early action

  • Effective communication

What should companies consider in their strategic plans?

In order to be prepared for challenges of any type, businesses must engage in strategic planning with sensitivity analysis — they must anticipate not only the most likely scenario for the forecasted period, but also unexpected scenarios. Questions to consider include:

  • What will we do if revenues/sales exceed projections by 10 percent?

  • If sales and revenues exceed projections, do we have adequate resources and productive capacity to meet increased demand?

  • Can we increase production without incurring overtime or other extraordinary costs?

  • If not, how profitable will this incremental business actually be and should we take it?

  • If sales and revenues fail to meet expectations, what will be done to protect margins and profitability?

  • How quickly and effectively can we reduce labor costs?

  • Can we defer capital expenditures and, if so, which ones?

  • Can we conserve cash through better management of inventories or accounts receivable?

Is it valuable to have a specific, proactive plan?

It is vitally important to think through the process strategically to identify and prioritize the steps to be taken. This way, when the unexpected happens, you have a plan that outlines what needs to be done and in what order.

It is also helpful to obtain capable advice and seasoned judgment. From board members to senior executives to outside professional advisers, having team members with good judgment who have worked through troubled times in the past adds great stability and promotes confidence in all of your constituencies.

What are some warning signs that might indicate early action is warranted?

  • Are principal customers modifying order patterns? Get into the details and understand the ramifications as soon as practical.

  • Are suppliers experiencing financial distress or business interruptions? Investigate — have they suddenly taken a more aggressive position on accounts receivable or are they trying to modify payment terms? Has their service, ability to fill orders or the quality of their products recently declined?

  • Are you sole-sourced or significantly concentrated with any single supplier or a small group of suppliers such that a disruption in their business could significantly hurt yours? Seek to find an alternative supply source for critical components and materials.

What is the value in carefully monitoring your business?

Whatever your business, identifying the key drivers, monitoring them carefully and, if you notice a change, getting into the details immediately enables you to identify problems and take curative steps early in the process at a time when you have the most options and you can select the options which are best for you and your business.

In troubled times, it is also important to be aware of the need to adjust your business plan to capitalize on opportunities. Where there is adversity there is opportunity, and it is often important to identify and seize the same.

What are some basic things a company can do to effectively communicate with its constituents?

  • Tell your story simply, clearly and consistently. Once you have chosen a course of action, choose one or two principal spokesmen, make sure they are on the same page in terms of the fundamental elements of your plan, and make sure that all your communications are consistent with these elements.

  • Deal with it at once. It is axiomatic that the best course of action is to collect all of the bad information, disclose it at once and put the problems behind you. When dealt with in this way, problems are more easily put in context, understood and quickly become yesterday’s news.

  • Underpromise and overperform. This rule is never more important than when dealing with investors and lenders. While there is often pressure to give hopeful or aggressive projections for future performance, it is ill-advised and will almost always come back to haunt you.

Richard M. Bolton heads the corporate practice area at Dickinson Wright. Reach him at rbolton@dickinsonwright.com.