Newsletter February 2009

Getting through a tight spot

For many companies, 2009 is proving to be exceptionally tough. A sharp drop in orders combined with a reduced access to finance, is having a dramatic impact on cashflow, and thus seriously reducing scope for manoeuvre. In these circumstances, what does an organisation need to focus on to best improve its chances of getting through the downturn in one piece ?

Below are five key issues which companies in this situation are going to have to address:

1. Increasing revenues
Many companies have seen their sales drop sharply over the past few months. Orders which once seemed imminent don’t materialise and prospect lists become more and more tenuous.

A key objective here is to ensure that your product or service is not seen by customers as discretionary spend and thus likely to be deferred or cancelled. Companies will need to demonstrate how their product or service can solve a customer’s problem and understand clearly how it matches up against competitors’ offerings. (See below for our guide to marketing in a downturn). You’ll also need to be able to clearly identify your target market – exactly what defines someone as a potential customer and how are you going to access them?

None of this will work without a competent sales team. If you’re happy with your answer to the questions above about your product meeting customer needs, market segmentation, positioning and competitiveness and yet you’re still not getting orders, it might just be time to find a new salesperson....

2. Controlling costs
Increasing your income has got to be preferable to cutting costs, but overhead reduction may become unavoidable and in many cases this will mean reducing headcount. Many organisations are undoubtedly using the downturn as a reason to remove dead wood built up in the good times, but it is where cuts affect employees who are critical to the company’s future that the real pain starts. When the economy eventually pick up (which it will) it’s essential that you’ve retained your core team – the people in your business who really add value. As we’ve seen with sectors such as the automotive industry, moving to shorter hours may be a better long term alternative than cutting headcount if you want to thrive in the future.

Conventional wisdom suggests that companies should avoid cutting their sales and marketing activities in a downturn although this is often easier said than done (anyone noticed how newspapers seem to have got thinner recently ?) but marketing activities need to be as focused as possible. We’ve produced a short guide to marketing in a downturn. For a free copy, please email info@psi-ense.co.uk

Many other overheads may be less fixed than once thought. For example, do employees who spend all day hunched over a keyboard, communicating with colleagues and customers alike by email, need to come to work in an office with all the costs involved ? Would working from home, plus a twice weekly meeting work just as well ?

3. Accessing other sources of funding
For almost all of us, this is the most difficult period to access funds that we will have encountered. Banks are withdrawing credit in order to conserve their resources and this is likely to persist for a long while yet. At the same time, VCs are avoiding early stage ventures to ensure availability of funds for their existing investments. And yet...there are still business angels looking for companies with exciting products, government seed funding, whilst harder to get is still available, and full advantage should be taken of R&D tax credits where possible.
For those of you with patents, there may be licensing opportunities available in markets you haven’t been able to access yourselves.

4. Keeping stakeholders informed
It’s important to realise that in most cases, banks and creditors would far rather work with a customer through their difficulties than push them over the edge. As long as you have a credible plan, most banks and suppliers will prefer to give you a breathing space (although often with stricter conditions attached) than to pull the plug. What third parties hate is the feeling that they’re being strung along. It’s vital to make sure that your bank, investors and key suppliers are kept well-enough informed to avoid them making knee-jerk decisions.

Within the company too, it is important to manage expectations. Employees are far more likely to accept reduced hours or enforced holidays if they can see the company has a plan in place and there is light at the end of the tunnel.

5. Prompt and accurate reporting
In order to keep stakeholders informed of your position, it is absolutely essential to have a clear picture of your current position and your expected performance going forward. At the core of this will be your cashflow forecast. A common pitfall is to have a future projection on Excel which gradually loses touch with the real numbers (debtors, creditors, cash etc) coming out of your financial software package, and putting routines in place to make sure your forecast accurately reflects current performance will pay dividends.

Future projections will need to be as realistic as possible. A good routine here is to produce three scenarios; most likely, best case and worst case, and then ask two questions: What do we need to do to get to the best case? What will we need to do if the worst happens?

Sadly, we at Psi-ense are old enough to have been many ups and downs (like being FD in a company where a key supplier breached contract, reducing the company’s potential revenue by 60% overnight – ouch !) but we’ve lived to tell the tale. If you’d like to discuss any of the issues raised above please call Chris Budleigh on 01306 876505 or email chris@psi-ense.co.uk