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By Wayne Rivers This article is Part 7 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. 32. Avoid top line sales growth obsession (What to avoid or of what to be wary) Many family and closely held companies become obsessed over time with sales growth. They love to say “our sales are up 10% over last year” or “50% over the last five years.” Sales growth is certainly a metric of a healthy company, but there’s sales and there’s the right kind of sales. Pushing top line sales ever higher — or keeping sales from falling — is an obsession for some. Are all sales or all projects good ones? Are all customers the right kind? Is all margin good margin? The answer to these questions is undeniably no. Focusing on sales as a health metric is alright, but it is more important to focus on the quality of sales and what that top line can add to your bottom line in terms of margin. Taking on too many low quality projects or low quality customers which don’t contribute to the profitability of the company can be a real mistake. 33. Undertake sales/lease-back arrangements for real estate (Cash flow) Many closely held companies have their business real estate on their company balance sheets. Back when the property came available, the family business leaders may not have had the funds personally to purchase the real estate, so they did so inside their corporations. Now that asset is trapped on the balance sheet as an asset which produces little income. In essence, its an underutilized asset. Where circumstances are appropriate, it may be wise for the owners or relatives of the current business leaders to purchase that real estate with a long term lease arrangement. That way, the company gets to keep its property and office which contribute to sales and profits, it creates an enormous cash windfall, and the balance sheet is relieved of an underproductive asset. 34. Enforce — or create —expense policies (Cash flow) In good times, it’s all too easy to let company officers and sales people pad their expense reports a bit. If your top salesman enjoys an expensive bottle of wine with dinner once in a while, what is wrong with that? If the son or daughter employed in the family business charges the company for a vehicle and expenses which are rarely if ever used for productive purposes, is that an issue? In boom times, maybe the answer is no. However, in recessionary times when every nickel of cash could be precious, there certainly might be issues with these and other unnecessary or luxury expenses. If you don’t have a written expense policy, develop one. If you do have one, make sure you enforce it. Family members and employees alike must understand that when there is severe and potentially prolonged recession, there is a new sheriff in town when it comes to expenses. Things which may be overlooked in great times become serious drains on productivity and cash — and maybe even morale — in lean times. 35. Communicate with key constituencies (Opportunities) It’s a pretty safe bet to say that your business looks different now than it did 18 months ago. The customer pipeline is leaner, competition is fiercer, margins have eroded, sales have taken a hit, and morale is down. This is the time when family and closely held business leaders must redouble their efforts to communicate with the three key constituencies: customers, employees, and advisors. The customers you have held on to are more precious than ever before. When times were booming, if you lost a customer, no big deal; there were two more to take its place. Now, losing a customer might mean the difference between positive and negative cash flow. Make sure you are communicating with your customers in order to retain their business. Let them know the steps you are taking to remain healthy in lean times. Inquire about the challenges they are facing and determine if there are ways in which you may add value above and beyond the simple provision of products or services. Second, communicate with your employees. They know things are different now. They too are inundated with the miserable economic news pushed out by the mainstream media. They too wonder about the future and how the recession will affect them and their families. Communicate with them about all the positive things which are happening. Convey a message of encouragement. Keep them in the loop as you consider alternatives for making your company leaner. Most important of all, solicit their help; you’ll be surprised at how resourceful and committed some of your employees are. They’ll amaze you at the cost savings ideas they come up with and the personal sacrifices they’re willing to make. Third, communicate with your advisors ESPECIALLY your bankers. Bankers don’t like surprises, so keep them in the loop regularly about the things you’re doing to manage your company’s health. Remember, when it comes to communication, too much is just about right. 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 8 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.
April 2009
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