EXTENDING YOUR RUNWAY In a Downturn
My “Recession Playbook”
Some disturbing thoughts came rushing forward this week. Ones that I'll never forget, after going through so many recessions in my career. The cause(s) of the coming economic crisis are different, but the effects "will rhyme," and not in a good way. Some of these points may not pertain to your business directly or at all, but for most businesses it will. As such, you may be able to share some of my hard-learned lessons. Here are a few points from my "recession / economic downturn playbook;"
1. The economic downturn is almost always twice as deep as you think. Psychologically it’s hard to go there in the early days of a recession but after living through the:
Early 80's "Stagflation" - Fed rate hikes to 20%+ and unemployment rate of 10.2%
1990-91 Savings & Loan Crisis - GDP -3.6% and unemployment rate of 7.8%
Y2K Scare, .com Bubble & 9/11/2001 - GDP 1.7% and unemployment rate of 6.3%
The Great Recession of 2008-2009 - GDP -2.5% unemployment rate of 10%
I have that "I've seen this movie before" perspective.
2. Recovery from downturns almost always take twice as long as you (and others) think. It's an "optimist’s trap." Nobody wants to be a party pooper, so we try to put an optimistic spin on things. That's fine to help keep morale up but you should plan for the worst. As such, you must forecast a longer time in the "dumps" and stretch your "cash runway." Here's a list of defensive actions I've used:
Cut the "C" players. Cut the ones in "foul trouble" (attendance, behavior, performance etc.) This is usually an easy one and the remaining employees will appreciate you for it. Unfortunately, you'll need to plan on a 2nd cut, so make that list at the same time (it's easier that way). Resist cutting hard to hire/train "Core Competency" talent. These are the people that are core to your company strategy and differentiation in the marketplace. There might be departments that cry foul, "I had to cut in my department; why not Engineering?" Hold the line and protect the "A" players. After the 2nd cut, reduce hours by 20% where you can, to preserve the "core team." A reduction of 20% on hours is the point that you can qualify for the state "shared work" program. They reimburse 50% of lost wages to employees working 32hrs or less (get HR advice on this). Dig into "recurring expenses." These seem to creep into the P&L in the good times. Everything from unused subscriptions, office maintenance (people can dump their own garbage), to laundry services, free bottled water, office supplies (hoarding), etc. You'll be Stretch terms with suppliers. This is always a controversial one, because the fear is that "they'll cut us off." They won't, if you advise them that this is a temporary measure and you will return to standard terms when the storm passes. Some suppliers will grumble, but they will not cut their nose off in this situation. They need to partner as much as you do. Reset inventory "max/min and Kanban" levels in the ERP System ASAP. Likewise, look at purchasing practices (Purchase Order approval limits, etc.) that are out of sync with the lower business levels. Miss this one and it (the inventory and tied up $$) may be staring you in the face for a long time and may eventually need to be dumped (written off). Meet with your bankers (lenders and/or owners) to see where the "end of the rainbow" is regarding debt limits and/or lines of credit. You must know the numbers and run a cash flow projection to follow. “Fail to plan….Plan to fail.”
I hope I’m “crying wolf.” In case not, I hope this helps you and your clients prepare.
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