Making Your Ship Seaworthy
While times are indeed turbulent, and the economic waters are choppy, there
are several things businesses can do to successfully navigate through this difficult
period. Below are 10 management priorities that company leaders can implement
to help improve the company’s strength.
1.Preserve Cash Flow. Cash is the company’s most precious re-
source, and never more so than during tough economic times. The
leader must implement strong cash flow measures that might feel un-
comfortable, even “Draconian” to employees and stakeholders.
“Preserving cash and access to cash is of vital importance—perhaps even ‘
life-or-death’ importance—for companies right now. The capital markets are severely
constrained, and access to outside financing is scarce and at times complicated,”
said Gary Sebek, former CEO of Rudy’s Organic Bakery, CFO of Aurora Organic
Dairy and currently a managing partner at
2x Consumer Products Growth Partners.
“Companies must institute strict controls over key financial measures to preserve “I have actually found
cash, as well as keep very close management that times of recession have
of spending such as travel, headcount, HR
and all discretionary expenses.” been good for business.
The checklist of cash management measures includes the following:
• Accounts receivable. Record diligently,
Families go back to the
every week at the minimum, and watch
“Days A/R Outstanding” like a hawk. Be basics. They prepare meals
persistent (and diplomatic) in contacting
non-paying customers. Many times “the home, and when they do they
squeaky wheel gets the grease” and the
most persistent vendor receives payment become more aware of the
first.
• Accounts payable. Record as diligently as
receivables, every week, and watch “Days food they are eating. A/P Outstanding.” Use the judgment of ”
the head of Finance to determine which
payables to pay and which to hold. Communicate regularly with vendors to
keep them apprised of the payment schedule.
• Working capital and inventory. For most companies, much of the company’s
working capital is invested in inventory. During a time of constrained capital, it
is imperative that inventory be kept as small as possible to preserve cash liquidity, while remaining ample enough to adequately service orders. Maintaining
both high product service levels and cash liquidity simultaneously is one of the
toughest balancing acts for the leadership of the company.
• Tight control on spending. The company must institute an entire corporate
culture of savings to help preserve valuable resources. One good way to help
maintain greater cash control is for the CEO or CFO to personally sign all
checks above a certain level. They, along with the head of finance, should look
carefully at each invoice. It’s very important for the leader of a company to
have a visceral, “tactile” feeling about expenses and spending.
Blair Kellison, CEO of organic tea-maker Traditional Medicinals, views the
careful management of resources and close communications with financial partners as two of his key priorities during the current downturn. “Traditional Medici-
nals has a strong balance sheet and a
healthy cash position, but we have in-
creased our level of attention nonethe-
less. We now have weekly versus
monthly financial status meetings, dur-
ing which we closely examine receiv-
ables, payables, inventory and cash on
hand,” he said. “We also keep in even
closer contact and communication
with our bank. I find that communica-
tion with lenders and investors is criti-
cal. They see the news reports and
have a general sense of anxiety, so we
stay in very close and frequent contact
to let them know exactly what our fi-
nancial condition is at all
times.”
2.
Manage for Gross
Margin. While conven-
tional companies generally
operate with a gross margin well above
50 percent, organic companies saddle
themselves with a far lower margin, fre-
quently under 40 percent and some-
times much lower. It is literally
impossible to operate effectively over
the long term with an insufficient
gross margin, especially during diffi-
cult times. The solution is for organic
leaders to “attack” cost of goods relent-
lessly, mapping out all of the compo-
nents that comprise cost. This cost
control must extend to every ingredi-
ent, carton, case and component that
adds to cost of goods. In the best or-
ganic companies, cost control is a
deeply embedded cultural value, in
which all employees are keen ob-
servers of cost and have a mandate to
seek out and reduce cost whenever
and wherever possible.
Sebek notes that gross margin is as
important in most cases as EBITDA
(earnings before interest, taxes, depreciation and amortization) as a key
measure of company value. “Many investors and institutions that formerly
used EBITDA as their principal measure to calculate the company’s enterprise value have begun looking more
at gross margin as the key indicator of
