How do strategic growth-oriented organizations find and exploit the opportunities inherent in any downturn? Recently, Ernst & Young surveyed 3,100 entrepreneurs around the world to discover the actions entrepreneur-led companies are taking to remain on course during the current economic times. Contrary to what you may think, the survey found that today’s economic environment has opened up space in local and global markets.
Strong business leaders are adapting to the difficulties in sourcing finance and maintaining liquidity, and understanding the pressures on their people, customers and suppliers. Change for everyone seems inevitable, and already some businesses are emerging as leaders in accelerating that change. What do market leaders need to do to be successful?
Despite the changes in the economic environment, net cash flow determines management’s focus. The dominant trend in the past six months has been an acceleration of management’s efforts to improve business performance. They are right to do so regardless of economic scenarios:
- If the recession continues — or even worsens — then cash and access to credit will continue to be constrained and conditions will remain extremely difficult. The focus on relative performance will intensify.
- If the rebound is already in sight — if there really are signs of “green shoots” — management needs to be prepared to act quickly. Typically, a rebound arrives with speed, giving management little time to respond.
Three elements are critical to an organization’s ability to react to future opportunities: an efficient operating model that maximizes your company’s strategic advantages, cost reductions that do not damage the organization’s strategy or customer’s experience, and a focus on cash forecasting.
A robust cash-forecasting process can create a “cash culture.” Improving cash awareness through internal procedures and policies drives an increase in accountability and responsibility. In addition, successful companies acknowledge financial concerns before they become a burden and make swift decisions when they need to be made.
Expand your customer base
A majority of entrepreneurs surveyed — 67 percent — are pursuing new market opportunities. But growth is only possible when companies have the required resources, and for now, this means cash. A strong liquidity position provides the basis for a wider array of financial choices to have available when business conditions improve, whether that means broadening a customer base, attracting and retaining people, acquiring strategic businesses or assets, or driving operational performance.
At the same time, entrepreneurs understand that some customers will probably fall away during tough times, and they reinforce procedures to manage these reductions or failures. When expanding your customer base, keep these three things in mind:
- Understand whether your products or services are necessities or luxuries. Position yourself to help your clients through leaner times.
- Focus on neglected or overlooked markets while building customer loyalty.
- Manage your customers’ perceptions of your business.
Review tax position to uncover cash
Tax is between the third and the fifth largest expense for most companies, but only 23 percent of entrepreneurs surveyed review their tax strategies to reduce expenses and uncover cash. Government deficits and revenue needs are affecting global tax policy around the world. The recent fiscal stimulus package includes significant tax measures — in fact, tax measures comprise a larger share of the overall packages compared to spending measures, including:
- Accelerated depreciation programs.
- Carryforward and carryback provisions for net operating losses.
- Adjustments to corporate income tax rates.
- Enhancements to research and development tax credits.
- Indirect tax changes.
While some opportunities are likely to arise from this, there are also many potential threats and a general tightening of enforcement and compliance efforts by tax authorities.
Focus on core skills
In being forced to reflect on the health of their businesses, entrepreneurs may initiate a transformation of their business model so it becomes significantly better adapted to tomorrow’s environment. They do this by identifying their core competencies and focusing on what they do best. Ancillary functions not aligned with key strategic goals can be considered as potential outsourcing targets, while divestment may be appropriate for service lines that are not aligned with the core business.
The survey of entrepreneurs suggests that, generally, there has been a pulling back of plans to outsource or to use shared service centers. Internal audit, tax and legal services and knowledge management are key exceptions where lack of in-house skills may force the decision. Companies may be reluctant to transfer responsibilities to a third party in today’s environment, preferring to retain control in-house. However, outsourcing may well provide the increased flexibility and cost reductions that business leaders are looking for. A credible case can be made for outsourcing non-core roles in order to safeguard the core, laying the foundations for a durable, flexible business model that will position an organization more strongly in a post-crisis environment of increased competition and tighter cost control.
Reshape your business
To broaden their customer base or enter new markets, many entrepreneurs see a marked increase in potential mergers and acquisitions at reduced prices. Their recipe: cautious raising of capital mixed with a renewed focus on having the right balance sheet and business model to capture acquisition opportunities. Their advice: Divest unprofitable units while seeking and investing in opportunities from the crisis.
These are times when new market leaders rise to the top. The economy is not a zero-sum game where one side must always lose to let the other win. Only if the majority of businesses improve will the economy turn around.
The views of the entrepreneurs surveyed reaffirm these messages and make one major addition — the need to act more quickly. Regardless of whether recovery is just around the corner or the clutches of recession risk are getting tighter, there is no time to delay improving your business. Accelerating the change is the only option.