Troubled economy plan Featured

7:00pm EDT December 26, 2008

If the sluggish economy will require your company to do some belt-tightening this year, you’ll need to be very deliberate in your approach. Any plan — and plan is the key word — will need to consider both the risks to the organization and the financial impacts.

“An important part of the process is risk assessment,” says Harry Cendrowski, CPA/ABV, CFE, CVA, CFD, CFFA, managing member, Cendrowski Corporate Advisors LLC. “If you eliminate certain jobs or functions that you didn’t realize were vital to your business, you could become seriously vulnerable. The same holds true for putting off important investments in your business. When you look at the organization from the bottom up, you often find opportunity to make improvements — not just cuts.”

Smart Business asked Cendrowski how companies can do a better job by approaching restructuring from an organizational perspective.

What is an operational assessment?

An operational assessment focuses on the strengths, weaknesses, opportunities and threats in an organization. Independent, outside firms are typically engaged by boards to conduct the assessments, to ensure objectivity. It is a comprehensive assessment of the organization that provides insight into how an organization actually works and how well it’s prepared to deal with future events. Assessments help organizations learn to become proactive rather than reactive in dealing with short and long-term challenges. This is an especially critical skill considering the rapidly changing nature of the current economy.

How can an operational assessment assist a company when making organizational changes?

An operational assessment helps you identify not only key functions of the business, but also key contributors. In turn, you gain a better understanding of the essential elements to keep the business running. By identifying those processes and individuals that are essential to the success of the organization, you’ll be able make more informed decisions in troubled economic times. The operational assessment also evaluates the quality of the information you’re receiving (e.g., it can uncover management reports that are collecting inaccurate or the wrong types of data), so you can feel confident you’re making decisions based on accurate and relevant information.

Furthermore, an operational assessment identifies areas of risk for the organization. An organization may have a certain risk tolerance during economic prosperity, but in an economic downturn that risk tolerance is likely to be lower. Additionally, the likelihood and impact of certain risks may increase (or decrease) in a recession. An operational assessment helps you not only identify the risks, but quantify them as well.

How can an operational assessment help a business plan?

An operational assessment supports the strategic plan. The strategic plan defines the objectives for the organization, and is essential for success. The organization needs to align detailed procedures with the strategic goals. The operational assessment also looks at the organization from the bottom up, looking at detailed procedures and how they are performed. Often, the assessment reveals where changes can be made to improve efficiency and save costs and still improve results.

An operational assessment also facilitates contingency planning. This is extremely valuable information for a business undergoing changes to ensure all options are considered and proper actions are taken.

Give an example of how shortsighted thinking could harm a business.

Any area of the business you are considering downsizing requires a thorough understanding of all the pros and cons, whether it’s reducing staff or production, shortening shifts, delaying implementation of IT improvements, or unveiling an updated Web site. For example, say you have five people in accounting and you reduce the number to two. Will your system of controls still be in place? Or will the same person who cuts checks end up reconciling the books? If so, you could be increasing the opportunity for fraud. Or, looking to the example of the Web site: if you depend on e-commerce to survive but your site is slow and outdated and your customers are going elsewhere, it’s going to hurt in the long-run. The bottom line is that cost savings in the near term could cost dearly in the long term.

What things can management do now?

Make sure you have a good view of your current situation along with clear objectives for the future. When evaluating your objectives, ask: ‘What do we need? What are the best ways to meet our objectives?’ If you don’t know, you could be vulnerable. To protect yourself, begin the planning process immediately. Building a good foundation now will help ensure you are in a good position when the economy starts improving.

HARRY CENDROWSKI, CPA/ABV, CFE, CVA, CFD, CFFA, is managing member of Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or cs@cendsel.com or visit the company’s Web site at www.cca-advisors.com.