Five common mistakes to avoid when your business is facing tough times

Salaries are delayed, suppliers are screaming on the phone and you are desperately trying to find ways to increase the cash flow.

Twenty-four hours in a day doesn’t seem to cut it and all of your day is spent firefighting. There just isn’t sufficient time to sit back and think. These kinds of situations lead to hasty and often incorrect decisions.

Here are some of the most common mistakes and how you can avoid them –

1. Not taking any decision and waiting for the market to pull you out of the hole

If that unlikely event ever happens, you probably end up with your key employees gone, no cash for investing for growth and often with deteriorated customer and supplier relationships. You need to show the market, your employees and other stakeholders that you are controlling your own destiny by taking action.

2. Keeping the numbers to yourself and convincing stakeholders that everything is running smoothly

Trust me, the word will get out if you are not paying salaries or suppliers on time. If you are not being transparent with your banks and you try to hide the problems under the rug but then breach covenants or miss a repayment – the trust is gone. That is a major issue at a time when you probably need their cooperation the most. How could they trust your turnaround plan when you haven’t been transparent and straight with them earlier?

3. Using the cheese slicer approach when cutting costs

This approach is close to the worst approach that you can have in distress – not doing anything at all. Similarity lies in indecisiveness: you are not willing to take those tough decisions, or you haven’t done your homework to understand where you need to cut deep and therefore you are just going to take a little bit from everywhere.

This approach has a few major flaws – it doesn’t change anything fundamentally and it completely disregards the potential constraints in the business. When your cost cutting initiatives are not targeted and carefully selected, you risk reducing cash inflows.

As an example, you might reduce the maintenance of a bottleneck machine leading to a lower efficiency or unexpected downtime – no matter what you do in other areas of the business, the bottleneck dictates the output and consequently incoming cash. The key in any cost cutting exercise is to understand the impact on customers and cash generation ability – focus the cuts on departments and processes where the impact on these is zero or very limited.

4. Focus purely on the top line

Trying to trade your way out of stress is a very common pitfall in the region. When your only focus is getting more sales in, what usually happens is that your sales team push the products out to the market when there is no actual demand. They might negotiate all sorts of deals with the customers, e.g. including lower prices and/or extended payment terms. They also produce inflated forecasts which only result in increased raw materials. These issues lead to increasing levels of working capital: you have paid your suppliers, but the cash from sales sits in your customers’ account. And when the market picks up again? Your customers have enough of your products in stock for a while, so you will not ride the first wave of upturn.

Ensure your business is cash focused. The key means for this are: aligning incentives to support the working capital optimisation, training and monitoring the correct metrics. This top-line driven culture is often deeply-rooted in the company’s DNA so there is no such thing as over-communication when trying to get the new message across.

5. Not having an accurate cash-flow forecast

If you don’t have a robust weekly based cash flow forecast for the next 13 or 26 weeks, you are steering the ship blindfolded. You need to understand which invoices you can pay and which you need to stretch – this needs to be coordinated tightly with operations. What often happens is companies pay the suppliers that scream the loudest, ignoring the strategic importance of the supplier and the materials or services they provide. We have heard of an instance where a company had work-in-progress goods worth $2m which were waiting for a part worth $20 in order to be completed and shipped.

The quicker you react in a downturn, the better chances of success you will have.

What this means is that companies that have their hand on the pulse will be able to take action before getting into that snowball effect where lack of cash will lead to operational issues. Monitoring leading indicators and not just lagging indicators is a good first step.

Matti Kasi is director of Turnaround and Restructuring at Alvarez & Marsal Middle East