Cash is king but being agile will help your business survive in a recession.
A child of the late 70s I grew up with an awareness what was meant by ‘being in a recession’. My parents were righty anxious about their futures, what would the world be like for their children and how could they keep their incomes and make their money go further… we were brought up on the principle that money was about saving not spending. Recessions in terms of the economic and social impact hasn’t really changed but as consumers our approach to money management has, which is possibly why the Bank of England is preparing us for the sharpest recession on record.
But businesses will survive – if they do and how well they do will come down to the options and choices they make. Here is my take on how to navigate your business through a downturn.
Cash is king
I have always believed in these commonly accepted “rules” of Cash Management
Cash is king
Businesses do not fail because of lack of profits, but lack of cash
Save now for a rainy day
When the sun is shining, and the good times roll it can be easy to relax your grip. That is not to say business should always be risk averse but if you run your cash management tightly, you’ll have more options when you are in the eye of the storm. It might sound simple but, for me, when in crisis it is all about having options rather than being forced down one path– and that’s what cash allows.
Timing helps
Economic history shows us some interesting examples. In early 2000, a five-year-old online bookseller called Amazon.com sold $672million in convertible bonds to support its bank balance. One month later, the dot-com bubble burst. More than half of all digital start-ups went out of business over the next few years – including lots of Amazon’s then-rivals in e-commerce.
Had the bubble burst just a few weeks earlier, one of the most successful companies ever might have fallen victim to that recession.
So we agree Cash is important. It gives you options, but what do you need to do to survive – and maybe even thrive – in times of severe economic stress? Agility. The ability to be agile in order to adjust in the high pressure environment of recessionary change management.
How to be agile in a recession
Decision-making
This is not simply the decisions that are taken but who makes them and the internal structures that allow the decisions to be made in the first place. Whether a business chooses centralisation or decentralisation can have a significant impact on how they can respond and adapt.
During tough times, companies have typically leaned towards centralisation, for economies of scale and the cost savings of fewer facilities. It can also be argued that because centralised companies have a tighter more streamlined structure they have a better picture of the organisation as a whole and can align their incentives more closely with company performance. But is this hierarchical controlled approach the most agile?
Research suggests that taking a decentralisation approach resulted in relatively better performance for firms facing the economic crisis in 2000. Decentralised firms are better positioned to understand local information and client/customer priorities which became an advantage. They could then adapt quicker with devolved decision making.
This is the predominant behaviour that we have seen during lockdown as offices, departments and teams have worked out how to ‘adapt’ quickly to the new situation both in how they could keep operating and how their customer wanted to engage. We have seen accelerated innovation from taking a solution-focused ‘can do’ approach which has allowed new ways of working be trialled before rolling out to the wider business.
Good leadership now is knowing when to delegate, how to listen and spot innovation, and when to deploy those learnings wider.
Streamlining with sensitivity
Very much aligned with the organisation structure is workforce management. Some layoffs are inevitable in a downturn. However, the companies that emerge from a crisis in the strongest shape rely less on layoffs to cut costs and lean more on operational efficiencies. I wrote before about investing in your employees, they are your assets.
The unsettling effect on morale of redundancies will have a negative impact on productivity at a time companies can least afford it. You have invested in your workforce and being able to retain their skills could pay dividends rather than having recruit and train up from new further down the line.
So what are valid alternatives? The Chancellor is all over the furlough option but other ways to achieve a similar result are reduced hours per head and company-wide agreements to forego bonus or leadership pay cuts. I would suggest there is also an option to ask your workforce for voluntary reduction in pay and hours. There may be some people who are grateful to take unpaid leave of a sabbatical instead of trying to juggle work and homes schooling which is likely to be with most families with school aged children for some time to come. With this in mind, it’s not impossible to imagine that you may end up with increased workforce loyalty and even emerge from a recession in better shape.
Prioritise technology…or should that be data?
Technology has been the enabler during lockdown, and we’ve seen working practices, products and services deployed online very quickly. What has gone is the long lead times from idea to implementation. Using rapid iterations of design and test being ‘good enough’ is being released to market and that’s ok. Tech has also opened up new marketplaces which have enabled businesses to retain their workforce (or layoff less) by deploying them into new business areas. The recent news that Pret a Manger are closing 100 shops could have been much worse in job losses if they weren’t investing in innovation to open up new revenue streams with click and collect, evening delivery menus and increased product footprint on Just Eat, Deliveroo and Amazon.
Technology can make your business more transparent, more flexible, and more efficient… data will do the same for your decision-making. So it’s worth investing. The immediate advantage of prioritising digital transformation ahead of or during a downturn is that improved analytics can help management better understand the business – how the recession is affecting it, and where there’s potential for operational improvements. It also provides an opportunity to cut costs, particularly if companies look for “self-funding” transformation projects that pay off quickly.
We’re being told that the UK economy could shrink by 8% in 2020. Whether that prediction is accurate remains to be seen, but what we do know is that only the most cash savvy and agile businesses will survive. I very much hope you are one of them.
For interim management support please contact us Simon.Jones@FortitudeLondon.com
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