In times of economic hardship, irrespective of how long tailed such downturns may be, simply holding out for better times without thoroughly examining the fundamentals of your business is fraught with danger.
Focusing on the opportunities within your business for enhanced efficiency, improved processes and stronger culture, despite the weaker economic conditions, can put your business in the best shape possible for the circumstances and be the driver for aggressive growth and greater success when the economy turns.
Having already survived nearly two years since the downturn began; a good question to ask is what kind of shape the business is in. The most likely scenario is that your business fits into one of two categories. One, that you examined the fundamental revenue and cost drivers of your business and improve your cost structure without weakening your product, quality or brand. While revenue is down, your business model is robust. Alternatively, you have made cost cuts out of necessity and you have survived the storm but the cost cutting initiatives are likely unsustainable and not only has the fat been cut from your operations but also some of the muscle.
Regardless of which category you fit into, opportunities for sustainable and value adding improvement exist and it is rarely too late make lasting improvements.
This article aims to provide a three step process to perform a health check of your business and assist in identifying the opportunities that are waiting for you to take advantage of.
Step 1: Understand where you are now – the before and after shot
Having survived the downturn you are in the fortunate position of having relevant and meaningful data about your company’s performance and current shape. This data is incredibly valuable to your business, as long as it is used constructively.
From this you are able to breakdown and quantify which areas of your business are working for you. In order to fully appreciate how different your business is now to how it was previously, you can use a number of different diagnostic tools. One such tool is ratio analysis, which can be highly effective as it allows for easy comparison between periods of performance and against industry benchmarks.
In order to gain a full appreciation of the shape your business is in, you should widen your ratio analysis to review the following:-
Liquidity – are you able to better service your debt and short term liabilities than before?
Efficiency – how successful have you been in improving how your business manages its resources? One of the more effective analytical tools in this category is to calculate the cash conversion cycle.
Profitability – how successful have you been in achieving profitability in light of reduced revenues and changes in cost structures?
Leverage – has the debt structure in your business improved or have you taken on more long term debt to survive the downturn?
Step 2: Lock the improvements down
Resist the urge to believe that the improvements you have made to your business will be sustained without concerted effort. Instead, you must communicate to your team the areas that have worked well and create the right culture and understanding across your workforce so that these improvements are firmly imbedded into your business. Missing this vital step may lead to a swift return to old ways and remove the benefit of the hard learned lessons of the past two years.
Step 3: Improve again
While Step 2 may have validated the good decisions you have made in the past two years, it should also serve to help identify the areas that still need your attention. It will be an opportunity missed if you do not look at the areas of underperformance that remain in your business. The advantage of focusing on further sustainable improvements to your cost base or operating efficiency at this stage is that you can use the momentum and positivity gained in Step 2, and from the past two years of tough decisions, to set the bar higher for your business going forward.
It’s a new world out there…
The economic landscape has changed and the way in which you do business has too. In order to set your business up for future growth and get maximum benefit from the inevitable upswing, two things will be necessary.
Firstly, that you ensure your business remains lean and efficient, as this will better enable you to profit from increased revenues and generate better margins.
Secondly, maintain a cash culture. Cash management is often the first area to be relaxed as times improve; however, in order to truly benefit from an improved economy and generate growth, strong liquidity and cash management will prove to be your ally and catalyst for success.
In closing, through a deep understanding of how and why your business has been able to survive and with a renewed focus on continued sustainable improvement, you can be optimistic about the future, regardless of how long the downturn may be.
The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG. All information is of a general nature and is not intended to address the circumstances of any particular individual or entity.