Don't be the next Woolies

Two types of businesses fail during economic downturns. The first are businesses that are not strong enough to withstand deteriorating market conditions, the second are essentially sound businesses whose ability to survive is undermined by poor management.

While individual businesses cannot control the course of economic events, it is possible for management to adopt a strategy that goes some way towards controlling their own destiny. Key self-help techniques - focusing on cash, stakeholder management and effective scenario planning - can make all the difference in surviving the storm and help the business to emerge from the downturn in the best possible shape.

Cash really is king

In recent years, when a company faced a funding problem, liquidity was available within the banking system to help resolve the issue. But capital is now scarce and companies can no longer rely on either fresh financing or even the renewal of existing facilities. In the forthcoming PricewaterhouseCoopers global CEO survey, more than three-quarters of UK chief executives said they expected to fund future growth from internal cash resources, with only a quarter expecting to fund growth through debt.

It is easy to treat the "cash is king" mantra as a well-worn platitude, but companies need to relearn the skills required to focus effectively on cash. After years of growth, many managers have no experience of a recession and have grown accustomed to using profit and loss as the gauge of how well their business is faring. In a downturn, businesses must monitor cash flow closely. For example it is recommended that businesses prepare weekly cashflow forecasts for at least the next quarter.

Once a business has a grasp on its cash flow, then management can challenge how and when every pound is spent. The management of cash should be the responsibility of not just the finance director, but of everybody within the business, particularly those dealing with suppliers and customers.

No surprises

Communication with staff, banks, creditors, suppliers and customers should increase, not decrease, in a downturn. There is only one thing worse than delivering bad news and that is delivering bad news late. That sends a negative signal, which undermines trust and can be interpreted as management not being fully in control.

Similarly, with employees, there is no point in trying to say everything is fine, if palpably it is not. It is easy to lose the trust of staff if a company insults their intelligence by keeping them in the dark. Redundancies may be necessary -although given the cash costs involved this should not be management's first thought - but by engaging with staff, a sense of unity in the face of adversity can be fostered.

Looking ahead, flexibility in remuneration and working practices as a means of minimising redundancies can help ensure the company has the right workforce in place when the economy starts to pick up. Many businesses are service-driven and rely at some point in the sales cycle on repeat business or referrals. Focusing on the customer will not only benefit business reputation, but can also be an effective means of identifying the best customers and addressing any weaknesses.

Have a plan

The length and severity of any downturn is uncertain, which makes business planning difficult. Deciding whether an unexpected slump in sales is a new trend or merely a blip that will quickly be reversed is very difficult, and calls for a different response depending on the outcome. Endless scenario planning can be of limited value, but with a focused approach, a business can establish the extent of its operating headroom.

A company should have three scenarios: a best guess outcome, one modelling 10%-20% downside and a "bank payout" scenario. The latter estimates by how much sales can decline while still allowing the business to meet its commitments to external stakeholders. If a drop in sales of 20% would mean the business could not pay the bank, a different response is needed than if the critical point is a 50% decline. Establishing parameters helps with difficult decisions, such as when to postpone capital expenditure or R&D programmes and when to consider selective closures or divestments. Scenario planning also improves a company's agility.

As market conditions change, if the analysis has been done ahead of time, a company can implement its strategy more quickly and gain a competitive edge relative to its peers - an important consideration for the eventual upturn.