Five Lessons From Recession Woes
Lessons learned from enduring a difficult and complex business enviornment.
During the past several months we have all listened to or read from the various “experts” regarding their thoughts on the great recession we’ve recently endured. I’ve realized, as I’m sure many of you have, that you can pretty much decide whatever you want in terms of the current economic state of affairs and then quickly find an economic expert opinion to back up your theory.
Whether you decide that we are officially home-free from the recession, still bogged down in the economic crisis, or in the worst-case scenario, heading for a deeper recession, there’s one thing we can all unanimously agree upon: Our businesses will never and can never be managed in the same way.
While riding the waves of the economic storm, I learned some important lessons that helped keep my business alive. What follows are five of the lessons I’ve learned from enduring the difficult and complex business environment we have all witnessed over the past few years.
Lessons one and two
Let’s begin with managing cash and budgeting capital acquisitions.
Lesson 1 –managing your cash: The first thing that becomes blatantly apparent during tough times is that your customers don’t actually pay you very well. And it doesn’t really matter if they are big name-brand customer – they still don’t pay you very well. To make matters worse, your vendors also are hurting, so they need their money sooner rather than later. So understanding your cash position at all times is critical.
One suggestion I have that will help here is to set up a system that tracks your cash flow daily. For example, in our business we have a daily cash report sent out from our accounting department that indicates the amount of cash that came in the day before, the amount that went out, and the current state of both accounts receivable and accounts payable, as well as significant cash obligations coming up that week such as payroll or sales taxes. Because we review the state of our finances daily, we are able to accurately track our cash flow, both in and out of the business. This report will encourage you to spend more time on collections, making sure you have a constant and consistent flow of cash into your business and will also keep you on your toes in terms of managing your cash obligations.
Lesson 2 – budgeting your capital acquisitions: Money spent on the purchase of new equipment, new vehicles, property improvements, or any other kind of capital expenditure needs to be scrutinized very carefully, especially when times are tough. The past two years have actually brought our company a much better discipline in terms of acquisitions. While it might seem easier during a recessionary business environment to say, “Hey, let’s just stop all of our capital acquisitions for awhile,” it isn’t really very practical for most shops. What is practical, however, is to implement a budget process for all capital expenditures.
Let me recommend a process that has worked well for our business: Put together a full list (aka “wish list”) of everything that you might need to acquire within the next few years. Keep smaller purchases (anything less than $1000 or $2000) off the list because they are more manageable. Categorize each acquisition as an “A,” “B,” or “C” purchase. The As have the highest priority. Then rank the A, B, and the C categories into their own priority order so you know what the most important acquisitions to the business are. When cash becomes available, make the purchases. This is a much more organized and planned approach to spending precious dollars on your capital needs, and you’ll ensure that all of the company’s acquisition needs are met while keeping on budget.
Lessons three, four, and five
The final three lessons deal with employee costs, efficiencies, and customer care.
Lesson 3 – dealing with employee costs: We often take for granted just how much money our employees cost. The fact is, employee costs usually represent one of the highest costs to our business, thus need to be the most tightly regulated. Learning how to keep your employee costs down can help your business save a lot of money. At times, we move too quickly when it comes to choosing to hire a new employee, often omitting necessary steps to evaluating whether or not we really need an additional employee instead of perhaps improving some processes and gaining efficiencies in alternative ways.
Additionally, we frequently hire without calculating the full financial impact to our businesses. For example, a $20-per-hour employee will cost the business more than $40,000 in salary per year, and when you add benefits and payroll taxes this quickly exceeds $50,000 per year. So if that employee stays on for four years, that’s $200,000 out of your company’s pocket. What might initially seem like a small amount of money is actually a very significant cost over time. The lesson learned here: First, make sure that you actually need to add an employee to your workforce; second, make certain they become a productive and efficient employee, because they are costing you some real cash.
Lesson 4 –operating efficiently: When times are tough, the pressure to produce jobs accurately and efficiently is greater than ever. But we sometimes get caught up in the other aspects of the business and overlook the just how much we can save by simply avoiding efficiency killers such as waste and mistakes. Dig into your operations in detail and find out what processes are causing waste and rework in your shop. Here’s my suggestion: Avoid accepting waste and rework as “just part of business.” Figure out how to fix the problems that occur, whether they are employee-related or process-related. Once you have your management and your employees engaged in a constant effort to improve processes and workflow, you will continue to experience real cash savings on a regular basis.
Lesson 5 – taking care of your customers: Last but certainly not least is regarding your customers, and how you deal with them during financially challenging times. The most obvious recommendation is to do everything possible to keep your key customers – you just can’t afford to lose them. But beyond the struggle to provide great customer service is the challenge of dealing with customers that are themselves experiencing significant financial pressures.
As a result of the recession, customers are now asking for price concessions or are required to bid all of their jobs out and award them to the lowest bidder. The best way to avoid a knee-jerk reaction and immediately drop your prices is to figure out the best ways to add value to what you’re already providing your customer. This might entail extra customer service, superior fulfillment processes, Web support, or a number of other ideas that don’t involve decreasing your profit margin. The point is, get yourself out of a situation where you’re just providing a product for the lowest bargain price. During tough times, you have to fight to keep your margins up more so than ever, and the best way to do so is to provide value-added services to your customers so they simply can’t afford to lose you.
I think it’s safe to say that we all hope to never again have to endure a recession like the one we have just experienced. But by the same token, I think we’ll all agree that we can’t afford to drift back to old business practices and pretend that everything will be the same as it was before we hit these challenging times. Things won’t ever be the same. We must act in a constant state of defense, taking every precaution necessary to keep our businesses afloat. Every penny spent must have a justifiable purpose and every business decision made must be strategically weighed to ensure successful longevity. If we are to move forward in the coming years and maintain healthy and sustainable profits, we all need to make drastic changes.
Marty McGhie is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations. The company offers high-quality large- and grand-format photo, inkjet, fabric, and UV printing. firstname.lastname@example.org