How to prepare for lean times?
June 15, 2020
There is no better time to prepare for an economic downturn than when business is good. How should companies prepare for an economic downturn in the cool of the day rather than reacting in crisis mode in the heat of the moment?
The economic data across the Eurozone has deteriorated at an accelerated pace in 2019 as the probability that the entire Euro Area falls into a recession is rising. While Italy is the only country that is in an officially declared recession at this point, the data is suggestive that Germany, France, and the broader EU are not far behind.
At this time, most established business plans do not contemplate an economic downturn. However, some observers are forecasting a recession in EU within the next years – say, by 2020. Everyone is watching interest rates, trade, government spending, geopolitical tensions and other “tea leaves” carefully. The truth is, no one knows what the future has in store. That’s why, for most companies and their management teams and boards, a contingency plan makes good business sense, as it positions them to act decisively when recessionary storm clouds begin to loom on the horizon.
Creating a plan in a thoughtful and deliberate manner helps ensure the plan is supported by detailed analyses, adequately considers sequential actions and/or seasonality, maximizes the options available to decision-makers, and addresses considerations relating to contractual obligations, employee/union issues and regulatory compliance.
Some aspects you should consider in a time of recession.
Headcount and hiring changes
Human capital is commonly one of a company’s largest and most controllable expenses. Management must carefully evaluate the cost-benefit of its investment in human capital in a distressed environment. This is a time for shepherding the talent that is most critical to retain.
Compensation, benefits and incentive plans adjustments
Temporary revisions to compensation, benefits and incentive plans may be necessary to stabilize the entity’s financial condition. Vetting the economic realities of a declining top line and the need for adjustments to the reward system with key personnel before the distress begins is a productive step that creates a broader support base for the plan when it is implemented.
Capital-intensive and diverse companies may have underperforming assets or divisions that can be sold to stave off losses, reduce debt, and generate liquidity and working capital. Alternatively, there may be high-performing, non-strategic assets that can be sold to raise capital. In developing the contingency plan, management should categorize the company’s assets.
Selling, general and administrative (SG&A) cutbacks
SG&A offers many opportunities to reduce costs. In the context of a contingency plan, the objective is to adjust the cost structure to support stabilization and preservation of the enterprise.
Timely and open communication is vital to preserving morale in tough times so that employees know where they stand, which will help them and the organization get through the crisis. Straight talk and transparency are very effective because, from an employee perspective, no news does not necessarily mean good news. It is indeed a stressful time for everyone due to what is almost sure to be a soft job market.
An effective plan also should determine the key metrics to be managed against management’s specified targets.
Need advice for your organization? Schedule a time for consultation.
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