‘The times are tough, meeting the covenants and agreed KPIs with banks are incresingly difficult and we are facing the cash-flow crunch’ is the most common feedback from CFOs and treasurers. CEOs are faced with questions about return on equity and value to the shareholders.
There are many approaches businesses take to manage such situations. There are two popular schools of thoughts or approaches with the CFOs and CEOs. One of them is ‘to cut costs’. In most cases, the largest cost an organisation incurs as far as the operating costs are concerned; is the personnel costs (typically between 45% to 92% depending on the industry, size and nature of the business). For businesses, this approach would mean, cutting the costs till they can, gaining a short term handle on the profitability measures through spending less on personnel costs (along with other measures) and then once the situation seems to be in control, start recruiting again.
Another approach that is employed is – ‘to increase productivity’. The approach would be to remain in a ‘hold’ position for most of the personnel costs, change to the top gear to increase the productivity ‘dramatically’, be honest with the banks, financiers and shareholders, have an effective cash-flow management plan in place and ride the storm. Not only that but be proactive, have a strategy in place to effectively continue generating higher profits and execute it with discipline.
Well which one is better? The answer is – it depends! It would depends on the state a particular business is in, depending on the stakeholders of the businesses,, it depends on how long the economic environment remains in a particular state, how good the management or the company can plan and execute strategies...and so forth and so on.
It is not always easy and/or feasible to take especially the second approach when/if the top level jobs are on the line and the shareholders and financiers are unable to work with the management very well. However, when feasible, the second approach may be worth considering.
Bringing innovative solutions to business problems, including the top line retention and/or growth, effective management of cash (remember, cash is the king!), better margin/pricing management, usage of technology to ramp up productivity where possible.... are some of the key steps under the second approach. When up-to 92 percent of business cost is labour, then even the marginal improvements in the labour productivity in the right areas can have a reasonable impact on the bottom line with it’s flow on effect on cash.
At the same time, there can also be a hybrid approach of the first and second approaches and that may be well suited for some organisations........
In the coming weeks, I would be tackling some of the measures the C level executives can adopt to take on the challenge of managing in the current economic climate.
