Determining how best to fortify a business to withstand shocks such as customer losses, reduced credit availability, supplier freezes, and so on, is a multi-faceted question that many entrepreneurs, whether by choice or by necessity, have confronted recently. While resolving this question carries nuances particular to an industry, CVF has found the following to be useful, time-tested principles whether you are an entrepreneur at the helm of a business, a private equity ("PE") manager providing direction to a portfolio company, or an investment banker offering strategic advice to a client.
1. Cash Is King
Regardless of the size of a business, maintaining liquidity is going to be essential over the next 12-24 months. A company should ensure that it has sufficient room under its revolving line(s) of credit and err on the side of excess availability. Accounts receivable and accounts payable should be carefully monitored and managed, without damaging business relationships. Businesses should reexamine any new capital expenditures, while managing down inventory levels. Many companies in this environment, for example, are rethinking the number of SKU's necessary to achieve revenue objectives, jettisoning slow turning inventory. Opportunities should be taken by management to renegotiate vendor agreements in the current environment. Lastly, to the extent that liquidity remains challenged, thought should be given to shoring up the company's capital structure by raising junior capital or equity.
2. Don't Focus Solely On Growth
This may sound counter-intuitive, but a myopic focus on driving (or restoring) revenues is not a cure-all for business ailments. The severity of the current downturn is such that PE shops are advising many of their respective portfolio companies to conserve cash and dial-back variable costs immediately. To aid in this process, PE professionals have had their portfolio companies put together three scenarios: 1) a "Base "Case," which assumes 2009 sales will be 90% of 2008 sales; 2) the same scenario, but inducing a further 10% haircut and; 3) a distress scenario that includes significant cost-cutting (most companies will trip loan covenants in the latter two scenarios). Decisions should be made now as to precisely what expenses will be trimmed under these three scenarios. Given that personnel expense is usually the single largest expense at a company, senior management should strongly consider taking a pay cut, particularly if layoffs or employee level pay cuts are being considered.
3. Retain Key Personnel
To avoid losing valuable employees permanently through layoffs, it may be wise to discuss furlough options. Some companies are also offering key personnel the opportunity to work part-time, while retaining their medical benefits. Another contact we spoke with, in lieu of annual bonuses, has offered employees equity in the company. The prospect of future incentives, be they performance or equity based, can be beneficial to morale and also serve the purpose of further aligning owner and employee interests.
4. Retain Profitable Customers
We are aware of one company which has organized its customers into 3 categories:
- "A" customers, who produce strong margins and have very few issues associated with servicing their accounts,
- "B" customers, who produce average margins with reasonable management issues
- "C" customers, who are low margin generators and consume valuable personnel time.
A company has to consider whether it might be prudent to redirect limited corporate resources to defend the "A" and "B" customers. In this economic environment, existing customer retention and growth may be a better investment than incurring the costs associated with new customer acquisition or earning the sub par returns associated with managing unprofitable accounts. Improving customer service usually costs relatively little, which makes it so that building out existing relationships can yield significant returns. Many companies we know have created action plans with respect to deepening key client relationships, such as holding high level customer meetings to examine ways to broaden ties (i.e. complementary service/product offerings, improving existing product/service lines, etc.).
5. Over-Communicate With Everyone
As a general rule, it is wise in the current environment to communicate with everyone around a business twice as much as last year. For example, speaking more frequently with bankers, attorneys, accountants and financial backers can greatly assist an entrepreneur in staying current on changing market conditions impacting his or her respective industry. Internally, special attention should be paid to salespeople, as they are an early warning system regarding potential revenue/customer deterioration. If there are weaknesses in the timeliness or scope of Management Information Systems (MIS) reporting, those issues should be promptly addressed so as to ensure that the management team has complete and timely information on key business metrics.
