Navigating Financial Challenges During Economic Downturns: A CEO's Playbook

10 min read

No business is safe from a difficult economy. Startups, small businesses, mid-market companies, and even enormous corporations need effective contingency planning to stay strong and survive the financial challenges that arise during economic downturns

Five Steps for SMEs and SMBs to Take To Increase Profits

Difficult economic times require business leaders to make decisions and adapt quickly to changes to strengthen their businesses and improve efficiency to survive and thrive. Taking the following actions can help you bolster your business to weather the next economic storm. 

1. Adopt the Right Mindset - What Is Your Reality and How Long Will This Last?
2. Be Vigilant About Cash Flow - How Long Will Your Cash Last?
3. Analyze "Below the Line" Costs Now - Identify and Review Non-Revenue Generating Overhead First
4. Review "Above the Line" People - Which Teams Are Driving Profitability?
5. Play Offense - Improve by Sharpening the Saw

Let's take an in-depth look at each of these steps that will help your business navigate financial challenges during economic downturns. 

1. Adopt the Right Mindset

What Is Your Reality and How Long Will This Last?

In times of economic turbulence, it's crucial to cultivate a mindset of abundance rather than succumbing to a scarcity mentality. The difference between these two perspectives can significantly impact your ability to be an effective leader, assess your business's position from an objective perspective, make necessary changes, identify opportunities, and weather the storm.

Scarcity Mindset - A scarcity mindset is rooted in fear, pessimism, and the belief that resources are scarce. A scarcity mindset fixates on that which is lacking while amplifying feelings of vulnerability and loss. This can result in a mental and emotional shutdown that makes it impossible to lead effectively or make smart decisions.

Abundance Mindset - Conversely, an abundance mindset is rooted in confidence, calmness, and optimism. An abundance mindset focuses on the opportunities and resources that are available to you, instead of dwelling on limitations. This mindset promotes the ability to see possibilities and solutions, allowing you to embrace change and achieve positive outcomes. The abundance mindset helps support proactive and effective leadership and decision-making. 

Define Your Reality

There are three basic realities or modes of business operations:

• Survival (We might not make it.) - In survival mode, you must focus on cash flow and cut your business costs to the bone. These must be your top priorities. 
• Restructure (We will make it but need to make hard decisions.) - In restructuring mode, you must continue to focus on cash flow and cut discretionary costs. Additionally, review and improve the ROI generated by your people. 
• Strengthen (We're okay and want to come out of this stronger.) - In strengthening mode, sharpen the saw! (See more on sharpening the saw in step 5.) Invest in your people and your business. 

Once you've identified and defined your business's reality, take an abundance mindset to a scenario planning session with your company's leadership team. You should strategize for your business's current reality in addition to contingency planning for the other possible realities. 

Remember You Set the Organization's Mood

As the leader of your organization, it's important to remember that the way you communicate your reality affects the energy and mood of the entire company. 

In the challenging landscape of today's business world, thrive, not just survive. 

5 Steps In Increase Profits in Turbulent Times. 

The Path To Profit Playbook: How to Thrive In Turbulent Times. 

[DOWNLOAD HERE]

2. Be Vigilant About Cash Flow

How Long Will Your Cash Last?

Cash is king. It's the lifeblood of your business, and cash flow tracks the timing of money flowing into and out of your business. According to a survey from Intuit (the company that develops QuickBooks), 68% of small businesses have cash flow problems, and these problems are serious because cash flow shortages can put you out of business. 

Effective business leadership requires that you have at least 13 weeks of cash flow visibility (i.e. cash flow forecasting). This enables you to manage your cash flow in a way that makes it possible to foresee upcoming shortages with enough time to fix problems before they become critical. 

Proper cash flow management through forecasting is always essential, but if cash is a problem in your business, then cash flow forecasting is even more vital to your business's health. 

With the ability to anticipate cash flow shortages and surpluses, you can more accurately budget and plan to prevent shortages before they actually happen in addition to making the most of surpluses, as they occur. 

Cash flow forecasting and management will help you sleep better at night because you won't be awake, worrying about unforeseen cash flow problems. 

You can also try the following tips to improve your cash flow.

12 Tips for Better Cash Flow

1. Focus on Collections - Follow the three Fs of collections: firm, focused, and friendly.
2. Accept Credit Cards - This helps increase cash and the speed at which you get paid. 
3. Automate Collections - This helps reduce bottlenecks and will get you paid faster. 
4. Follow a Written Credit Policy - Before the work begins, let every client know (and make sure they agree to) your credit and repayment policy. 
5. Check Credit References - If you're not getting paid upfront, you're giving your client a loan. Be sure you treat the arrangement as such by practicing due diligence whenever you forego upfront payment. 
6. Get a Down Deposit - Ask for the largest amount you can before you start the work. 
7. Bill as Soon as Possible - Billing weekly can significantly improve the timing of payments. 
8. Automate Billing - Study and streamline the billing process by taking full advantage of your accounting system. 
9. Pay Slowly Rule - Use Bill.com to pay on time but not early to maximize the cash available in your business. 
10. Manage Interest Rates - Pay your bills with the highest rates first.
11. Audit All Expenses - Now is not the time for unnecessary expenses! 

Good cash flow management should be baked into your business's operating framework. Look for opportunities anywhere you can to improve cash flow and avoid shortages. 

3. Analyze "Below the Line" Costs

Identify and Review Non-Revenue Generating Overhead First

Overhead (indirect) costs that don't generate an ROI should be closely analyzed. Use the following steps to evaluate all overhead expenses:

• For simplified analysis, group your overhead costs into four categories (administrative sales, sales and marketing, general and administrative, and product)
• Take an item-by-item approach to look at every expense.
• Cut anything that is not essential.
• Identify costs that lead to sales. Cut those that do not generate an ROI.

Additionally, consider the fact that most employees wish to work remotely (which is usually less expensive than having them in the office). Is there any way you can turn that desire into a benefit for both employees and your business? 

Next, consider whether you can outsource any part of your business to save money. Outsourcing turns fixed costs into variable costs, and, unless you need a full-time person, outsourcing can typically save your business 30-40%. 

4. Review "Above the Line" People

Which Teams Are Driving Profitability? 

Start by looking at a P/L by team!

You can closely evaluate ROI on labor costs by using unit economics to look at profit and loss statements by company, department, team, client, and/or job. When you identify which jobs or clients generate the greatest profits, you'll know that the people working on those accounts are your moneymakers. 

This enables you to pinpoint which teams or departments drive profits and which might need optimizing. This information can help you make more informed decisions and improve your resource allocation to maximize your company's overall profitability. 

With a granular analysis, you gain a clear understanding of where your business's financial strengths and weaknesses lie. 

5. Play Offense

Improve by Sharpening the Saw

In his book, The 7 Habits of Highly Effective People, author Stephen R. Covey's seventh step instructs readers to "sharpen the saw." By "sharpen the saw," he means to improve oneself. By improving yourself, Covey explains that you can continue following the first six habits and remain highly effective. If you neglect yourself in any way (i.e. not eating healthy, not exercising enough, not getting enough sleep, not working on self-development), then you won't be able to keep up with everything else. This seventh habit is essential to being an effective individual and leader.

Covey's seventh rule also applies to maintaining a healthy business entity. Do not allow financial crisis management to distract you from keeping your business sharp by investing in your people, technology, and automation. Sharpening your business through wise, strategic investments can help keep you afloat and even thriving during difficult economic times. 

Invest in Your People

Too many business leaders make the mistake of seeing their employees as easily and inexpensively replaceable. They focus so much on labor costs that they completely overlook the value of their people. 

Viewing employees as an expense results in:

• High turnover (Hiring and Firing Often)
• Basic Salaries
• Cheap Benefits

People are a business's most valuable asset, and their efficient productivity, knowledge, expertise, and happiness drive profits. If you recognize the value in your people and develop a human capital management strategy that helps you appreciate them and keep them engaged, then you'll get a better return on the money you invest.

Viewing employees as an asset helps you:

• Reduce turnover and retain top talent
• Improve culture, morale, engagement, and productivity through rewards and encouragement
• Develop employee skills and improve ROI on labor costs by investing in training

When developing strategies for tough economic times, business owners who fail to think about their people are failing to consider their business because your people are your business. Without them, your business wouldn't be operational or profitable. That's why it's essential to value your people, invest in them, and care for them even more than you value and care for any piece of equipment, space, or knowledge that is vital to your business. The people in your business are not easily (or inexpensively) replaceable. When they leave, their knowledge, experience, and everything you have invested in them leave too. 

Improving and maintaining an effective human capital management strategy is an essential step in financial crisis management for CEOs. 

Invest in Technology and Automation

A survey of 280 U.S. companies found that 62% of business owners had identified three or more major inefficiencies in their manual business processes that automation could resolve. 

Some people have a negative outlook on automation, seeing it as something that eliminates the need for human labor. Automation, however, is more focused on improving the kinds of work opportunities available for human employees. By eliminating the need for people to perform mundane, simple, repetitive tasks, automation translates to more available labor hours that can be spent on higher-value, human-level tasks. 

Automation reduces the time employees need to complete their work as well as the number of employees needed to complete each task. As a result, automation equals more hours focused on doing work that drives profits. With automation, employees have time to focus on high-level work that drives profits and business growth. 

Consider Outsourcing

From an operational perspective, outsourcing is a form of automating processes. What's the main difference? Rather than software executing the process, it's completed by humans who are experts in a given field. Outsourced, human professionals differ from internal employees in that they are less expensive to work with, and outsourcing people to handle non-core processes is an excellent way to save money and time while improving quality. 

How Outsourced Accounting for SMEs Can Guide You Through Financial Challenges

During an economic downturn, "business as usual" no longer looks the same. In a difficult economy, it's essential to reevaluate your business as a whole, improve operational efficiencies, and cut costs. Working with an outsourced management accounting firm can help you improve financial decision-making in downturns to strengthen your business, survive, and thrive.