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By Wayne Rivers This article is Part 3 of a series outlining the 90 best practices of successful family and closely held businesses and the actions which allow companies to weather economic storms. The 90 best practices don’t necessarily appear in order of priority, and, due to your particular circumstances, some of the practices will be more or less valuable to your closely held company. They will not be presented as exhaustive analyses; rather, each article will touch on a few of the best practices with a very brief explanation. More depth on each of the topics is as close as doing internet research or making a phone call to The Family Business Institute. As you read the series of articles, please try to select the highest impact practices upon which to focus. Trying to get your mind around all 90 best practices simultaneously would be like trying to enjoy a drink of water through a fire hose! The best practices will be concentrated in five distinct categories: 1. Cash flow, 2. Belt tightening & cost reduction, 3. Processes & systems, 4. Opportunities, and 5. What to avoid or of what to be wary. We hope this series is beneficial in helping you prosper in tough times. 14. Negotiate terms with vendors and suppliers (Belt Tightening & Cost Reduction) In a recession, it may be necessary to negotiate terms with your vendors and suppliers. If you are in a solid, stable cash flow position, you may actually have extra bargaining power with your vendors for the simple reason that they too may be experiencing a cash crunch, and your ability to pay quickly is most valuable to them. It may be wise to send a short, polite letter to your vendors, and you can include the following sample language: Because of the economic downturn, we are making every effort to reduce our overhead while maintaining sound business relationships with our suppliers. Because we’ve always been happy with you over the years, we feel an obligation to allow you the opportunity to review your charges to us prior to requesting competitive bids. Rather than discontinuing service that might only cause further economic struggles, our goal is to reduce our cost by 10%. If you are able to help us reach this goal, we will not pursue competitive bids, and we’ll make every effort to maintain our current level of business with you. We’ll hold off from requesting bids for the goods and/or services you provide until you have had an opportunity to respond. The favor of your reply is requested by ___. Thank you.
Negotiating – in good faith of course – with vendors could save serious money in hard times. 15. Be ruthless and dispassionate about cost reduction (Belt Tightening & Cost Reduction) We’ve talked many, many times in “The Family Business Advisor” about how family and closely held companies need to reexamine their definitions of stewardship. Over the years we’ve heard many business leaders say, “I don’t feel comfortable negotiating terms with that vendor because we’ve been doing business with them for so long, and I worry about the impact on their business if we make a change.” That is certainly a noble sentiment, but what about your family business? Isn’t your highest duty of stewardship the continued prosperity of your firm? Many family business leaders take the concept of selflessness way too far. While “ruthless” may be too strong a word for how you examine cost reduction, one should certainly be diligent, thorough, and dispassionate about seeking belt tightening opportunities. 16. Utilize zero based budgeting (ZBB) and analyze variances (Processes & Systems) ZBB is a method of budgeting in which all expenses must be justified for each new period. It’s timely now to talk about ZBB because we’re kicking off a new year where recession effects are clearly being felt by most closely held companies. The budgeting approach for most companies (and if you don’t do budgeting, shame on you!) is to look at what the company spent last year and either add or subtract a small amount to the total for budgeting purposes going forward. ZBB requires, on the other hand, the companies start from a zero base followed by an analysis of every function within the organization to chart out future period needs and costs. Budgets are then built around what’s needed for the upcoming period regardless of whether the budget is higher or lower than before. ZBB is very detailed oriented, and it can lower costs by avoiding blanket increases. It is, however, a time consuming process that takes much longer than traditional, cost based budgeting. 17. Focus on CEO and executive duties instead of personal production (Processes & Systems) Experts estimate that most executives spend 40% to 50% of their time doing things which other people in the organization could do just as well, better, or at a lower cost. In hard times, it is incumbent on executives to exhibit leadership and to focus like a laser beam on the highest payoff activities. The luxury of getting out onto the shop floor and operating equipment or running company errands like picking up the mail or making bank deposits is a foolish expenditure of time for executives who should be focused on business development and other high payoff activities. Rationalizing low payoff executive behavior because “that’s the way we’ve always done it here” can be a death sentence in hard times. Examine how you spend your time, and make sure you’re doing high return activities instead of activities which should be done by others. In every downturn, some companies not only survive but prosper. We earnestly hope this series will help you reach your fullest potential. The 90 Best Practices for Recession Survival (and Maybe Prosperity): Part 4 Wayne Rivers is the president of The Family Business Institute, Inc. FBI’s mission is to deliver interpersonal, operational and financial solutions to help family and closely-held businesses achieve breakthrough success.
February 2009
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