Unprecedented but Not Uncharted: Lessons Learned from the Great Recession
If it’s true that our memories are tied to emotional events, then for many of us, the current COVID-19 global pandemic hasn’t crowded out the crisis management lessons learned during the Great Recession. The Great Recession financial crisis spilled over into nearly every aspect of our lives. Recall the bank failures, liquidity challenges and fear that many manufacturers faced. At that time, BKD advised clients to “cut deeper, cut faster.” While that isn’t the advice to heed quite yet, there are several lessons learned from the Great Recession that are instructive as we face a hopefully shorter-lived financial setback. With this in mind, here are several steps to help manufacturers ride out the current situation and remain poised to bounce back.
- Construct a 13-Week Cash Flow Forecast to Identify Liquidity Gaps
In nearly every crisis management scenario, it’s paramount to understand your company’s cash position. In some instances, this is referred to as the collateral position. Even if your banker isn’t requiring this level of planning, we encourage you to begin before they ask. Remember, your cash flow forecast should depict the outcome of your many interrelated actions and decisions.
Consider the magnitude and timing of receipts and disbursements of cash. Your forecast should consider receivables, payables, payroll and other fixed payments. As you plan into the coming weeks, consider customer orders and necessary purchase orders. By assembling and then updating this information on an ongoing basis, you’ll gain discipline and creativity and be able to positively manage decisions that affect cash.
- Develop a Customer Credit Plan to Reduce Collection Risk
Undoubtedly, some of your customers will experience contraction in their businesses. As a result, it’s crucial that you communicate with your most important customers. As you step up collection efforts, do so from the stance of a business partner and not an adversary. In some cases, it may be worthwhile to temporarily offer a terms discount for faster payment. For noncore customers, make sure you have assigned someone to aggressively pursue collections. The unpaid small accounts will add up over time if you don’t monitor them.
Similarly, don’t fall into the trap of abandoning sales efforts or making deep cuts to your customer-facing personnel. Double your sales professionals’ efforts in promoting your most profitable products. You may find that a special, limited-time pricing offer will help close an important sale at this critical time.
- Formulate a Supplier Plan to Protect the Supply Chain
Just as with key customers, it’s important to communicate with your critical suppliers. Suppliers you have a long-standing relationship with are more likely to accommodate you if you need to stretch out payment terms for a period. Don’t lose sight of your business’s importance to your supplier. If you find yourself falling behind with a key supplier, discuss options to continue paying for ongoing purchases while paying past due invoices over an extended period.
- Create an Employee Plan to Protect Critical Employees
Next to material purchases, employee costs are typically a manufacturer’s largest expense category. During the Great Recession, many companies were forced to make painful workforce cuts. While we don’t yet know the depth and duration of this downturn, manufacturers should begin proactively planning staffing levels and be mindful of anticipated demand, core capabilities and sales and technical expertise. To bounce back quickly, your goal should be to preserve your core employee base. In reducing cost, a logical first place to start is to rein in overtime. Also, multishift operations should be consolidated, if possible, to reduce support needs.
- Manage Inventory to Identify Opportunities
In past turnaround situations with manufacturers, we’ve often witnessed management’s ability to temporarily improve cash flow by liquidating inventory. Because inventory management practices tend to bloat inventory levels during good times, consider reducing excess inventory positions by delaying replenishment orders. Likewise, identify suppliers with shorter lead times, thereby reducing what you must carry, and analyze specific material requirements versus planned customer orders with regard to your current manufacturing lead time. Delay purchases if they won’t translate into sales in the near term.
- Lead with Proactive Communication to All Stakeholders
It’s probably a human condition that when faced with adversity, we tend to “hole up and hunker down.” After you have fought back this tendency, assemble your senior team and work through your messaging for employees, customers and suppliers. For instance, when you announce a freeze on discretionary spending, be prepared to explain the situation and reasons behind the decision. When you ask employees to sacrifice, connect that sacrifice to the broader company and sense of community. Also, consider establishing standing update forums for employees. Open communication is critical in times of uncertainty.
Senior leadership should personally engage in dialogue with key customers and suppliers. Also, be proactive and reach out to your banker. Be ready with financial updates and your remediation plans, and don’t hesitate to seek assistance as federal, state and local agencies step forward with financial measures to preserve our manufacturing base. Be proactive—it likely will pay off.
As the coronavirus pandemic stretches on and the future remains unclear, manufacturers will benefit from recalling lessons of the Great Recession. These lessons don’t give us everything we need to know, but they do offer guidance in helping us know what to do and what not to do. The American manufacturing base is resilient, and with courage, innovation and toughness, we’ll bounce back stronger than ever.
For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.