Your cash flow model should have drivers that allow you to model different scenarios in your business. We now use the results of your cash flow model to plan the resizing or rightsizing of your business.
The most succes
sful businesses are those that anticipate early and react to opportunities and challenges quickly. In a growth phase, that means hiring, facility, equipment and inventory expansion, new produc
t lines, acquisitions, geographic expansion and more. In contractions, that means resizing the business and focusing on the core business, cost controls, cash flow and the runway available, emergency action needed versus business restructuring, and stakeholder relationships.
We don’t fully understand the implications of COVID-19 shutdowns on the economy and businesses in the coming months, but at some point, the economy will bottom and bounce back. We need a plan to navigate the recession and emerge as a market leader.
7 Success Factors to Rightsizing your Business
- Use data to determine the plan.
Use your cash flow model and business analysis to build consensus. You can model and test many different scenarios and then act based on this analysis. Review weekly and monthly as new intel and data becomes available. Be prepared to pivot as needed.
- Redesign the organization to create value, not just cut costs
Revenue growth covers flaws in an organization’s structure and business model. If a company is failing due to poor strategy, cost cutting doesn’t fix the problem. Consider the business model and organization in its entirety. Evaluate customer, product, business unit, and business channel profitability as compared to the investment and fixed costs attributable to each.
- Consider tactical improvements
Re-evaluate department budgets, discretionary spending, SG&A costs and incremental process improvements for increased profitability through cost reductions from new efficiencies. Study asset levels necessary to successfully execute the re-designed business model. Areas such as inventory, real estate, machinery and equipment. What is the ROA (Return on Assets) for each category in the re-designed business model?
- Involve mid-level managers
If mid-level managers participate in the rightsizing process, in addition to senior management, they are more likely buy into the process, communicate a positive story and effectively implement the new plan. Bring them in early on in this critical process. Encourage managers to challenge your plans but require alternative solutions to each challenge rather than a straight objection.
- Gain value from employees
Identify areas to improve efficiencies in business operations. Create standard operating procedures and Key Performance Indicators (KPIs) to measure and monitor performance. Incentivize each employee in a way that is aligned with your desired outcome – see KPIs.
- As you make staff reductions, communicate clearly
As you make necessary reductions in staff, share the criteria and current plan with all employees to ensure those who remain are aware of your intentions and retain productivity. You may consider alternatives to layoffs including reduction of hours, reduced compensation structure, furloughs, job redesign, or part paid sabbaticals with benefits/contributions.
- Communicate early with creditors
When you have your rightsizing plan, communicate the plan with creditors, request their feedback and engage in early discussions. Lenders respond very well to business managers who understand their business and can demonstrate their planned future path. This may also allow leniency in debt service if a lender has confidence in your plan.
Out of every recession, new market leaders emerge. Acting early saves cash and creates an opportunity for growth capital and hiring back employees when you’re growing again.
“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”
- Theodore Roosevelt
If you need help building a rightsizing or restructuring model and plan, please call or email us.
