Facing Up To Reality - Coombes Corporate Finance

Facing Up To Reality


Facing Up To Reality

There are few companies that are not immune to the recent and dramatic downturn in the economy. Most companies are facing a drop in sales which has a knock on effect on profits.  Companies are also facing tightening cash flow as customers are slower to pay and banks tightening on credit due to the financial crises.

Too often companies facing these problems perform the ostrich trick, i.e. bury their head in sand and hope when they come up for air, everything will be ok again.  This will not work in the current climate and companies must take key actions to analyse the current position of the business, proactively address the issues the company is facing and continually monitor progress.

It is vitally important that management have a complete understanding of its current business performance based on up-to-date information.  It is important to know and understand which parts of the business are working and which are not, which services or sectors are performing better or worse than others?  Which are more/less profitable? Which sectors are likely to be more/less affected by a continuing slowdown?

These questions can be best addressed by performing a detailed analysis of your company’s strengths, weaknesses, opportunities and threats.  This ‘SWOT’ analysis should be a reality check of where your company is now, the opportunities and threats it is facing, and focusing on all key aspects of the business, including:

  • The products & services you provide, their profitability, etc.
  • The Market, your customers and your competitors;
  • Service delivery including the range of services; efficiency; etc.
  • Management including succession planning; staff remuneration, reward and retention;
  • Management Information systems to provide you with reliable and timely;
  • Financial including profitability and cash flow.

The analysis will identify key contributors to the declining profits and you should then prepare a detailed plan on how you will address the issues.  This will probably include some hard decisions such as ending non profitable service lines, or even redundancies.  The important point is that management face up to these hard decisions and put together a proactive plan to implement them.  I would advise companies to document this plan (the “Business Plan”) and support the decisions with detailed projections of the business going forward. 

The Business Plan also needs to address the tightening cash flows by including detailed cash flow projections.  These should clearly show any cash flow issues that may arise in the foreseeable future based on your current banking facilities. Having identified these issues, you can then proactively address them by approaching your bank, presenting your Business Plan and working with them to find a reasonable solution for both parties. 

Once the plan is decided upon and is being implemented, it is extremely important that it is monitored and reported timely to the relevant stakeholders.  This can be effectively achieved through a Performance Measurement and Reward system.

You should summarise these measures in the form of so called key performance indicators (KPIs) and review regularly (usually monthly).  The KPIs should not only measure historic results, but also focus on the ‘key drivers’, drivers that will deliver the preferred financial results of the future.

I would recommend that one KPI is a rolling cash flow projection that project forward detailed cash inflows and outflows for a minimum of 2 months, with less detailed cash flows projections for the following 6 months.  This will assist in managing cash flow and avoid nasty surprises.

Appoint an “owner” for each KPI, typically the individual or group of individuals who have the greatest influence on the item being measured. Set targets for each measure in conjunction with the measure owner, so as to ensure ‘buy in’ both to the method of measuring and the target being set. 

Finally ensure the measurement system is linked to the reward system as the reward system is used to guide individuals to deliver the standards/objectives previously set out. This reward system should be clear, motivating and the outcome needs to be in the control of the person being held responsible.

In summary, companies need to be proactive in addressing the current economic situation and its effect on business.  Carry out a detailed review of the business, set out a plan to address the current treats and opportunities and monitor progress through regular KPIs. Finally, it is always more beneficial if an “outsider” assists and indeed leads this process as he/she will tend to challenge opinions more, bring experience from outside your company/industry and perhaps will be able to get a clearer view of the organisation.