Business Experts Recommend Running Lean in 2009

Our business environment continues to reflect tighter credit, lower consumer confidence and greater uncertainty. It is a good bet that caution will prevail at every level, for a long time to come. However, today's daunting conditions can also create opportunities for profitable, well-managed and conservatively capitalized companies, according to experts who headed a recent business panel discussion in Skokie.

"How to Position Your Company for Success in Uncertain Economic Times," was the subject of a high profile, interactive Executive Briefing hosted by Warady & Davis LLP, The PrivateBank, and Steele Temkin Advisors in January. The session, which attracted a sizable crowd of CEOs, presidents, owners and other senior management of Chicago-area businesses, focused on back-to-basics turnaround strategies and techniques to deleverage and run a tighter ship.

"Regardless of whether your business is thriving or feeling the pinch, there are many valuable enterprise improvement techniques that can help anyone proactively position their business for today's challenging environment," said Rick Franklin, CPA, Partner of Warady & Davis LLP, a Deerfield-based certified public accounting and consulting firm.

"You don't have to be in a crisis to benefit from these ideas, and you won't lose any meaningful growth opportunities by running lean. Instead, a healthy company may be able to take advantage of opportunity when and if it knocks, such as an acquisition," Franklin added.

"If there is financial pressure, but the bank has not started forceful action, you can get ahead of the curve and forestall a cram-down of workout requirements," said Gene Temkin, CPA, Partner with Steele Temkin Advisors, a Chicago and Florida-based consulting firm serving middle market companies on financial and operational improvement matters.

Panelists recommended a variety of strategies for success in the current market, including strategic review, break-even analysis, cost reduction and controls, and carefully managing creditors.

Strategic review

"Strategic review is an area that business owners often neglect, but which is now more important than ever," said Forrest Steele, Partner, Steele Temkin Advisors. "In light of the current business environment, is it possible to keep doing what we are doing or must some key changes be made?

Steele said he recommends that you "conduct an honest review of your company and look for areas that need to be improved. Examine your market position, results, risk and core competencies. Do you have a company mission and main value proposition? Is it easily communicated? Companies with a well-articulated mission, vision and strategic plan consistently outperform those without."

Break-even analysis

"On the surface, break-even analysis is a tool to calculate at which sales volume the variable and fixed costs of producing your product will be recovered. Another way to look at it is that the break-even point is when your product stops costing you money to produce and sell, and starts to generate a profit for your company," explained Temkin.

"Often, simply increasing sales isn't enough to ensure profit. A breakeven analysis can be used to zero in on what kind of costs should be attacked. It can also be used to target a given profit level, rather than just breaking even. This is a tool that can be very enlightening and is often overlooked," Temkin said.

Cost reduction and controls

"Conduct a line-by-line review of your costs, and take the attitude that anything can be reduced as you hunt for dollars, said Temkin. For example, don't hesitate to renegotiate with your vendors and ask for a better deal. You should also comparison shop. What would the impact be if one of your main suppliers went out of business? Do your homework and have back-up business partners in place. If you have any doubts, ask for financials. If your suppliers aren't willing to provide this information, think hard about why," said Temkin.

Likewise, try outsourcing as much as possible, Steele said.

"Are there tasks that could be accomplished more cost-effectively by outsiders? Could outsourcing free-up more of your staff's time for profit-enhancing activities? Is there an income stream you're missing out on because you don't have enough people to market/operate it? It's time to take a look at new possibilities," said Steele.

Employment costs are another issue to examine closely, Temkin noted.

"Every day we are hearing about more major lay-offs. Some alternatives to consider include examining idle employee time. Cut-out overtime or implement a 4-day work week. Lower or eliminate your 401(k) match. Implement voluntary or forced furloughs. Freeze wages and encourage employee buy-in on a wage reduction. And spread responsibilities around instead of replacing employees lost through attrition," he said.

"On the surface, these actions may seem undesirable, but it can actually be a win-win scenario. Employees keep their jobs and employers do not have to go through costly hiring and re-training of staff when things start to improve," comments Temkin.

Additionally, "make sure your insurance coverage is appropriate and fill any gaps. Look for premium reductions for workers' compensation if employment is down, product liability if sales are down, casualty insurance if inventory is down, etcetera. Your insurance broker should be able to help you secure some reductions or refunds," said Steele.

Asset efficiency and reduction

"When times are good, it's easy to overlook the problems caused by letting things slide. If invoices aren't done on time or if customers consistently pay late, so what? When cash flow is sufficient, the income leaks these practices create seem like trickles. It's not until times get tight that we realize we've actually created gushers. Stopping these leaks can generate cash," said Franklin.

Temkin recommends considering a number of ideas. Regarding accounts receivables, ask for customer deposits or increase the deposit percentage. Provide quick-pay incentives to boost cash flow. For slow-paying customers (more than 90 days) instead of terminating the relationship, request that they pay 110 percent for new orders. One hundred percent should be applied toward the current purchase, with 10 percent towards balance pay-down. Additionally, review your customers regularly and look for bad credit risks.

Concerning inventory, if you have low-profit items that aren't moving, evaluate stopping production of those lines. Also, look for undue freight and cartage costs.

When it comes to land and depreciating assets, Franklin said that you should sell equipment you are not using for cash. Consider sale/lease back arrangements whereby a company buys a piece of equipment and leases it back to you. This practice can free up capital for debt pay-down. Also, sub-lease unused space and renegotiate lease terms.

Managing creditors

"Unfortunately, the work-out areas of most banks are very busy these days," commented Martin Klauber, Vice President with The PrivateBank, one of Chicagoland's fastest growing lenders. "If you are feeling the pinch, communication is key. Return phone calls and provide any requested information."

Remember, added Klauber, "your lender desires to recover as much as possible, and the best way to do so is to keep your company operating. The goal is to return you to a healthy position."

Klauber also said it's important to contact key creditors.

"If your business is doing well, ask what they will do for you. You may be able to renegotiate more favorable terms. If you are struggling, ask for specific concessions," said Klauber. "Try to avoid like the plague any reduction in line availability and/or decrease in advance rates. Attempt to preserve as much flexibility as you can."

Moreover, "document your improvement plan and share it with your lenders along with monthly business performance numbers. Character and transparency are one of the most important parts of lending right now," Klauber said.

What comes next?

There is no magic solution in these recommendations, said Steele. This is roll-up-your-shirt-sleeves-and-stay-on-purpose time. Create a specific action plan for each of the aforementioned items with timelines, benchmarks and dollar results. Evaluate your plan for feasibility and to ensure that forecasted results will get you where you need to go, such as profit and cash flow levels needed."

"Create or update your operating budget and review results monthly. Look at your budget in conjunction with a rolling 13-week cash flow forecast, which should also be updated monthly," Temkin added.

"Enlist your employees to leverage their knowledge and obtain support for necessary changes,"said Steele. "Also, remind yourself that when you play it close to the vest, more fragments of information get out than you tend to think. The result is that stories get concocted based on partial information and speculation. Get some control over what people think by giving them as much detail as prudent."

Lastly, "if you are not battling dragons at your door there can be opportunities amidst chaos," Franklin said. "Use these and other strategies first to generate cash before diffusing your focus by looking to add new services or products. Then, you will be well positioned to ride out the decline and seize opportunities when they present themselves."

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