In my first article, I told how Davis Lumber, our family owned company, was hit 30 years ago with a downturn that lasted more than 12 years. We survived and eventually sold out to Star Lumber of Wichita, Kan., where I remained as an executive for many years. During my tenure at Star we faced several severe sudden downturns of up to 25% in annual single family housing starts caused primarily by the cyclical nature of the aircraft industry. We survived those as well. Now I'm a consultant.
My second article profvided some of the key strategies my clients are employing that I utilized in my own business and at Star Lumber to survive periods of extended severe business downturns. Now I want to take you through how to write an annual budget that will allow you to achieve an acceptable bottom line in a down market.
- Payroll management. Focus here first since it is the largest expense, percentage-wise, in your budget. Develop in advance a strategy on what your payroll levels will be at various sales levels. Evaluate all of your employees and determine who you must have long term as your core group of key employees. Rank all employees based on whether they are promotable, transferable, adequate, or mediocre. Reassign key employees as needed to keep them even if in different areas of responsibility. If necessary, establish whether pay cuts will be made and what strategy you will employ: across the board cuts, for instance, or one in which you makes the biggest cuts to owners, medium-sized ones to managers and outside salesmen and the smallest cuts to hourly employees. Establish a timeline as to who will be terminated at certain sales levels. Implement Incentive plans for various managers targeting specific measurable goals in their individual areas tied to our strategic plan.
- Management bonuses. Structure your management bonuses so that each individual manager has a significant portion of his bonus plan tied directly to the things he can most influence. A second portion should be tied to the profitability of that person's division (if applicable). A third portion should be tied to your company profit. It is not uncommon for effective bonus plans to constitute 30% to 50% of their maximum potential earnings depending on the level of the manager involved.
- Non-competes. It is a common strategy for some pro dealers to raid other businesses during downturns or when they enter new markets. If you lose key outside salespeople or managers, it could severely cripple your company. You should evaluate the pros and cons with your attorney of non-competes for your key outside salespeople, managers and others who you believe are vital to your long-term success. If you decide this is a sound strategy (which I believe it is), budget some significant funds to pay for these non-competes and view it as an investment in your future.
- Family members. If you have family members who are employees, it is important that they carry their own weight and be held accountable to a higher standard than non-family members. If you are asking your employees to accept cuts in pay and stay with you through the downturn, it is more palatable if they feel family members are carrying more than their share of the load.
Evaluate and adjust expenses wherever possible to high-profit dealers' benchmarks. Share these benchmarks with your management team and employees so they have a clear understanding of their individual role in the company being successful. Post meaningful graphs on specific benchmarks and your progress in achieving these goals in various workplace areas where your hourly employees can see them regularly. Tie individual management bonuses to the applicable benchmarks. Also, review these areas:
- Business hours, to see if they can be shortened
- Trucking expenses, for strategies to offset rising fuel costs
- Group insurance
- Interest expense
Let's start with accounts receivable management:
- Tighten your policies and focus on minimizing your hits from bankruptcies of your customers that can sink your company.
- Consider cutting off sales to all customers over 60 days (possibly 30 days) past due.
- File liens and mortgages as needed.
Now let's move to inventory management:
- Focus on productivity index improvement by improving margins and turns. Deal with product lines first and SKUs second.
- Change product mix to fit new marketing direction.
- Watch out for inventory shrink. Cutting back on the payroll for employees involved in managing inventory accuracy is tempting, but an unexpected large shrink has destroyed many companies in a downturn. You must maintain the necessary cycle counts and operating procedures in place to keep inventory shrink at an acceptable level (0.25% to 0.5% maximum for pro dealers).
- As for equipment, your marketing strategy may result in your exiting some of your manufacturing operations. Review all equipment for items that can be sold or leased to free up capital.
- Review all of your facilities and sell or sublease any that you have determined don't fit your long term plan.
Acquisitions and Divestitures
During my 44-year career I have been involved in 28 acquisitions, divestitures or start-ups as part of our ongoing business strategy. Acquisitions that fit your long-term vision should be regularly evaluated as part of your strategic plan and pursued if you have adequate capital. You should establish a list of potential acquisition candidates and build a strong relationship with the owners. There will be many opportunities to buy well-run undercapitalized businesses in the next five years. Conversely, some locations or facilities that you are currently in should be sold, leased or liquidated aggressively if they don't fit your new business plan.
Major projects should be evaluated during your planning process for possible inclusion as a major goal. Many strategic plans have a few major projects included that, if successfully completed, will play a major role in your survival. If so, these may be one or more of the key parts of your strategic plan. These will require a focused effort from some or all members of your management team. This varies widely by company and could include specific initiatives in reducing inventory shrink and/or bad debt, improving gross margins by a specific percent, selling a specific location(s), buying a competitor, etc.
Focus on Communications
You will have more success in keeping your key employees if you have frequent and open communications with all of your employees about where they business is and where it is going. f layoffs are necessary, consider cutting top management the deepest, with more shallow cuts for middle managers and modest cuts for your hourly employees. Likewise, it is important to regularly communicate with your vendors and your lenders about your strategic plans, what they can expect from your company in the upcoming months. If you have a board consisting of only family members, consider adding outside directors from within our industry or other areas where their expertise would be valuable. Participate in roundtables and build a network of dealers with whom you can share all types of financial data, marketing plans, benchmarks, survival strategy etc. In this environment roundtables are of particular value in providing you with a sounding board for almost any major decision. Dealers from all across the country are facing similar problems and many will have different views than yours about what options to consider. Utilize knowledgeable industry consultants to facilitate your planning process. They have dealt with many of the same these problems you are now facing and have seen how others have dealt with similar challenges.
This Too Shall Pass
Many well-run companies will not survive this downturn. Keep adjusting your plan and taking whatever harsh steps are needed. Do your best, focus on survival and let the chips fall where they may. Be realistic. Don't beat yourself up. If you see you can't survive, focus on a sale or orderly liquidation. It's better to salvage something rather than losing everything.