Survive Or Thrive
Posted on March 28, 2020 by Joseph Worth
Many companies have made operational changes during the recent down turn in the economy. If you are one of the ones who have not, your company may need to make some quick and aggressive changes. When doing so you must consider the business risks in addition to the immediate financial gains. For example, by eliminating certain jobs or products you may be taking out critical components of your business not realized until after the fact: short-term gain, long-term disaster. This could make your company vulnerable in the future. This holds true for the delay of critical capital improvements and inventory levels in your business as well.
When times get really tough, making expense reductions alone will not be enough. So when looking at cuts and expense reductions, one will need to look for opportunities in operational processes and products to make the necessary financial improvements. This means deeper changes to operations and products or eliminations of branches/divisions may be in order.
An Operations Review An operations review focuses on the strengths, weaknesses, opportunities and threats within the organization (SWOT analysis). Often, someone with operational and financial experience from outside the company will be contracted to review the operations and financial affairs of the business. This review provides insight into how a company operates and how well it is prepared to deal with the changing market and diminishing cash flow. The operations review helps companies make critical decisions. It also assists the company in taking a methodical “proactive” approach opposed to being reactive in dealing with short and long-term cash challenges.
The review will also help identify key revenues, personnel and expenses. As a result, you will gain a better understanding of the key components of your business to keep the company operating at minimal levels. By identifying these key elements, you will be able to make intelligent decisions during difficult times. The operations review will also evaluate the type of financial information you are receiving. It can determine if the key operating reports being generated (if they are being generated) are accurate and sufficient to monitor the business. Knowing that you have the right reports gives the confidence you are making fundamentally good business decisions.
Another benefit of an operations review is that it will identify areas of risk within the company. A company usually has a certain risk level during good times. However, in an economic downturn this risk level is likely to be magnified. An operational review will help you identify these risks.
Additionally, the review will further mold and validate the company’s business plans and financial projections – the road map to success. During this process, it will shed light on where changes need to be made to improve profitability and save money. It will also look at back-up plans in the event that the changes do not work out; a proactive vs. reactive approach.
A “realistic” financial model will need to be developed and modified to reflect the operational changes required. Often the numbers do not always work out or additional changes are required so it may take many variations to get to where you need to be. Plans and market conditions always change so it is good to have the model at arm’s length.
Caution! The operations review is driven to maintain or generate additional profits or to fix an unprofitable business. Accordingly, the company will need to continue to produce timely and accurate financial statements and key operating reports; often more reports will be required. It is imperative to have the proper accounting staff and an experienced CFO, regardless of the business’s size, to accomplish this. Often in difficult times the accounting department is trimmed down so far that getting good data on time is impossible. When a company is in a tailspin and terminates accounting personnel the spin will only accelerate.
What can the CEO do today? Get started now! Make sure you have a good management team in place and they are all on board with changes. You will need everyone’s ideas and support to make changes. Make sure your CFO or controller has the experience to get you to your goal. If necessary, seek outside help even if it is for a short period of time. It is always good to run your ideas by someone who has experienced this before.
Make sure you have a clear understanding of your goals and have a realistic financial projection that can be monitored monthly. Make changes to your plans as necessary. Have a set of key performance indicators you can review daily and weekly so you can make adjustments along the way.
When evaluating your operations, ask yourself what you “really” need vs. what you “want” to operate the business. If you do not know the answer to this question you should seek outside opinions. It is never too late to start the process; so start the process today! Putting in place the tools and review processes now will only help your future success and profitability.
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