Keeping profits up when the economy is down.

Recession, the “R” word – it’s everywhere. You can’t surf through MSNBC, CNN or even the local news without hearing a reference to the mortgage crisis, rising energy prices or falling consumer confidence. But recession does not have to be a dirty word. With the right foresight, planning and action, many companies not only survive an economic downturn, they can benefit in the long run because of it.

Streamlining Costs

The first step in preventing an economic downturn from cutting into your profits is to conduct a stringent analysis and streamlining of your company’s cost structure. The administrative and operational infrastructure of all organizations tends to grow in good economic conditions, but rarely is that matched with swift reduction when business volume ebbs.

Understanding your company’s cost structure is essential for reducing or eliminating costs that don’t impact sales. Both client-facing and support staff are involved in indirect expenses on a day-to-day basis. They are an excellent resource for identifying wasteful practices. An organization-wide approach to removing no longer necessary direct expenses and reducing newly unnecessary indirect expenses is the best way to ensure success.

With their input, as well as your company’s current sales projections, you can reasonably determine your available operating funds. This is very important as you need to know how much you need to cut back before actually beginning the process. There may be more capital to work with than originally thought.

Given the current unfavorable business environment, instead of focusing on your annual objectives, you should determine your 3-month objectives and related staff accountabilities. These decisions should be discussed with your staff members to keep everyone informed.

After determining your available working capital, formulating your business strategy is critical. Of all the initiatives currently underway, which are most likely to bring money in the door the fastest? Also, which of your initiatives would be the easiest and most cost-efficient to complete? These programs should be given the highest priority. While politically easier to execute, irritants and projects with small dollar-savings drain resources and attention from improvements that might save big money.

Labor Optimization Is Key

Unfortunately, during an economic downturn, some hard decisions need to be made. The most obvious way to reduce costs is a reduction in staffing. A determination needs to be made between those workers who add critical value and those who don’t. One could argue that an entire staff provides critical value. In this case, which members add the least? Are there areas where responsibilities clearly overlap? In this case, one person may need to fill the shoes of two in order to weather the economic storm. Those workers who add the most critical value and are not in the firing line should be informed of this decision to maintain morale levels.

Employee morale is crucial to ensuring that productivity remains strong and that the corporate environment remains upbeat. It is very important that you ensure worker participation by including them in communications so they know what is going on.

This is an ideal time for additional training. Cross-training workers boosts productivity and flexibility, as workers will possess the skills to cover for each other in the event of an illness, vacation or termination. This investment in extra training also streamlines the process flow and provides deserving workers with extra responsibilities.

Sales and Variable Costs

When projected sales decrease during a recessionary period, it is not the time to tie up working capital in the form of excess inventory. Management must identify costs that vary with production level and ensure that those costs are being reduced appropriately. During a downturn, management should utilize a multi-faceted approach to maintain or even increase company margins. One of the top priorities should be to build consistency across the organization regarding production and labor polices. If variable costs do not decrease in direct proportion to production decreases, management is failing to do its job. Essential to addressing such inconsistencies, the entire operation must be aligned toward common goals using common metrics. Performance indicators should be reviewed to ensure that they are appropriate measures of your progress to your goals.

Profit-enhancing key performance indicators include:
  • Ratio of overtime hours to total labor hours – As production slows, the amount of overtime also should decrease – preferably at a much faster rate, as reducing overtime should be a top priority.

  • Maintenance labor hours worked per maintenance planned hour – Are your maintenance people stretching out projects or doing unnecessary work?

  • Ratio of administrative costs to total labor – If your employee count has dropped, you need to ensure that your administrative costs are downsized to match your new business structure. Do you really need the same number of support staff?

  • Average span of control – Do you need as many supervisors as before if your direct labor headcount is down?

Managers and Supervisors

Improving management skills among first-level supervisors or managers gives them tools to improve margins. In an economic downturn, how these front-line managers perform their jobs is crucial, as they possess the ability to improve margins at the point of production. To their credit, many companies already recognize this, and are devoting greater resources to supervisor education. Unlike many types of training, the purpose of supervisor education is not just to transfer knowledge, but also to help instill a “culture of execution,” an environment in which plans are consistently converted to action. It is the focus on results that distinguishes this education from typical management training. The ultimate outcome sought after is not just a trained supervisor, but also rather an improved operation where the best-demonstrated production is achieved consistently, and the best-demonstrated performance is steadily improving.

In addition, management seriously should consider conducting an assessment of current company-wide processes and procedures. Are reporting procedures as fluent as required to support new, streamlined processes? Is company performance in line with industry benchmarks? It is essential to step out of the trenches and shift to a fact-based view where emotions are removed from the situation.

With a little planning, cost reduction and optimization of resources, virtually any company can survive the hardship of an economic downturn. In fact, while competitors dither, lean times are periods of opportunity. All it takes is a proactive approach, proper planning, and streamlined processes. Companies that properly adapt to current conditions will see an even brighter future when the economy shifts upward. 

Key Steps to Surviving a Recession

  • Conduct a stringent analysis and streamlining of your company’s cost structure.

  • Determine your available operating funds.

  • Formulate your business strategy.

  • Optimize your labor resources.

  • Reduce your total cost structure.

  • Improve management skills among first-level supervisors.

  • Conduct an assessment of current company-wide policies and procedures.