Written by Ken Nisly and John Zook
In times of economic downturn or organizational crisis, leadership becomes a critical determinant of a company’s ability to survive, adapt, and eventually thrive. Whether a leader is facing a recession, market instability, or internal struggles, his role within the company is vital.
This article explores key attributes of effective leadership during a downturn and offers insights into how leaders can steer their businesses through uncertainty toward recovery and growth.
REALISTIC ASSESSMENT: HOW ARE YOU AND YOUR BUSINESS DOING?
Whether you recently opened a business or have been in operation for 20 years, leadership includes constant assessment of your current reality. In a rapidly changing market, it’s essential for business leaders to consistently assess their company’s performance, potential risks, and opportunities. A realistic self-assessment allows organizations to make informed decisions, improve operations, and ensure long-term success.
Consider when you first began your business. Life may have felt simpler—you had fewer moving pieces, and you did most of the work. Running your business was fun and although volume was low, you managed and survived. You lacked cutting-edge equipment, but you improvised. Inventory and overhead were low, and profit margin was thin. And then you decided, “Let’s grow this business!”
In 2020, COVID interrupted life in unpredictable ways. Prices for materials skyrocketed, but so did your sales. Cash seemed plentiful but then your tax bill arrived. This era brought many changes to business life and personal life. Take a minute to evaluate how life has developed since then. What is your current level of enjoyment? What is your stress level like?
One way to evaluate how you and your business are doing is to picture a truck pulling a trailer. The truck represents your business, and the trailer contains your overhead. From your driver’s seat view, things may appear under control. However, how well do you know the contents of your trailer, the company’s overhead? How well are you controlling the trailer and is it firmly connected to your truck?
To lead your company well, it’s essential that you consistently assess your company’s performance, identify potential risks, and evaluate opportunities. Leadership requires flexibility as you serve a rapidly changing market. Taking time for self-assessment allows business owners to make informed decisions, improve operations and move toward long-term success.
INNOVATION AND CREATIVITY: SEEING OPPORTUNITY IN ADVERSITY
While it may seem counterintuitive, downturns present opportunities for innovation. Leaders who encourage creativity and out-of-the-box thinking can uncover new ways to reduce costs, improve processes, or diversify revenue streams. In times of crisis, companies are often forced to rethink their business models and explore new markets or products.
During the era when farmers hired threshing crews, a certain crew began moving their equipment from a finished field to the next one ready for harvesting. As they rumbled down the road, they came to a bridge positioned above road. Despite their persistent efforts, the threshing machine was too tall to pass under the bridge. To their consternation, they realized a detour around this bridge would add 50 miles to their trip, completely derailing their threshing schedule.
A young boy arrived on his bicycle, trying to get the men’s attention. The foreman kept waving the boy away saying, “Leave us alone! We’re busy!” At last, the crew admitted the only way forward was traveling the unplanned 50-mile detour. But out of curiosity, a crewman walked over to the boy and inquired what his pressing message was. The boy replied, “If you let the air out of the tires on the machine, it’ll go under the bridge.” Stunned, the crewmen followed the boy’s simple instructions, and their threshing machine fit under the bridge.
In a downturn economy, pay attention to the little things that can make a big difference.
Although your numbers may be consistent, what sells continues to change. Sometimes we forget that simple interventions can make a significant impact. When sales are waning, it’s often the little things that ensure survival. To see and recognize those little things will take some creativity and, perhaps, some humility.
Leading a business is like hiking the Appalachian Trail. This formidable trail of almost 2,200 miles stretches between Georgia and Maine. Every year, thousands of hikers begin the Appalachian Trail, but only one out of four complete it. Too often, enthusiastic hikers will overpack and hinder their ability to reach the end point. But a seasoned hiker knows what items to shed or leave behind.
Eventually, hikers with an overloaded pack must reckon with the reality that they cannot continue to carry their load and succeed. Trimming their load invites hikers to innovate and be creative with limited resources.
In a downturn, a business must also shed excess baggage to ensure survival. The risk of business failure in the first year is 25 percent. By year three it increases to 40 percent and by year five to 50 percent. No business owner plans to fail, but a business will fail if the owner does not plan.
Downturns often present opportunities for innovation and creativity. In times of crisis, a business owner is given the opportunity to rethink the business model, reduce costs, or improve processes.
JOB COSTING: THE KEY TO PRICING, BUDGETING, AND PROFITABILITY
The Bible character Job knew the success of a prosperous business. But then, one disaster after another demolished his wealth and Job was left desolate. In Job’s devastating misery, God said, “Whatsoever is under the whole heaven is mine” (Job 41:11b). And indeed, all we own ultimately belongs to our heavenly Father. He has assigned us the task of stewarding our resources. Good stewardship includes making sense of our business numbers.
If your company’s numbers look like gibberish to you, simply working harder will not result in more clarity. A driver once noted that passing a semi on the interstate terrifies him so much, he simply shuts his eyes until he has passed. Shutting our eyes in hopes that things will work out leaves a high probability of a sizeable calamity.
Job costing is a critical method used by businesses to allocate and track costs associated with a specific job or product. Unlike process costing, which is used for mass production of identical products, job costing is employed for unique or custom projects, where each job requires distinct resources and labor. This approach ensures that companies can accurately track costs and assess profitability for each individual job or project, whether it’s construction, consulting, manufacturing, or any service-oriented business.
Job costing considers direct costs such as materials and labor, as well as indirect costs like overhead. Each job or project is treated as a unique entity, allowing for detailed cost tracking and precise profit analysis. Many companies discover that 25 to 30 percent of what is built or manufactured is leeching from more profitable jobs or products. Thus, they are unintentionally decreasing the company’s profitability.
By using job costing, a business can determine how much a job costs to complete, which helps in pricing, budgeting, and profitability assessment.
Consider these points when pricing a job or product. First, subtract all the raw materials, supplies, cost of labor, and any other direct costs you have for that job or product. Next, apply the rest of your business overhead. This step is often where business owners make a mistake because overhead items on the balance sheet need to be included in job costing.
Once you have applied all these costs to your job or product, consider if the profit is satisfactory. If yes, the pricing has been structured properly.
Job costing is an essential tool for businesses that handle unique or custom projects. It allows for a detailed understanding of costs, which leads to better pricing, profitability analysis, and cost control. By accurately tracking costs on a per-job basis, companies can enhance their financial management, improve operational efficiency, and ultimately achieve higher profitability.
MANAGING OVERHEAD: BRINGING HEALTH TO YOUR BUSINESS
Overhead costs are an integral part of running a business. They include expenses that are not directly related to the production of goods or services but are essential for operations. Effective management of business overhead is crucial for maintaining profitability and sustaining the business in the long-term.
Overhead costs can be categorized into three main types:
1. Fixed Overhead: These are consistent expenses that do not vary with production levels. Some examples of fixed overhead are rent, salaries, payroll, insurance, and debt, including any loans from friends and family. In 2008, when the economy tanked, some companies had two weeks’ worth of work remaining. In spite of this, they permitted their employees to work 50-hour weeks, which was a mismanagement of payroll. Although companies want to give work to employees, it may be wiser to decrease hours for the sake of managing overhead. Many businesses hired more employees during the COVID era, and now might be time to reevaluate your workforce. Is it still sustainable?
2. Variable Overhead: These are costs that fluctuate depending on business activity, such as utility bills, transportation, office supplies, training expenses, and building repairs. Often when businesses begin earning $5 to 7 million, owners no longer track expenses accurately, which negatively impacts the bottom line.
3. Semi-Variable Overhead: This is a mix of fixed and variable costs, such as equipment maintenance or overtime pay. With repair costs, instead of simply looking at the dollar amount, keep track of the individual cost for each truck or piece of equipment and let that inform your decisions on repair work.
Effectively managing overhead requires a strategic approach, innovative solutions, and ongoing evaluation. By adopting these practices, businesses can reduce unnecessary expenses and improve profitability.
CASH FLOW MANAGEMENT: THE CORNERSTONE OF A THRIVING BUSINESS
Cash flow is the lifeblood of any business. This term describes the movement of money in and out of a company. Effective cash flow management ensures that a business has sufficient liquidity to meet its obligations, seize growth opportunities, and navigate financial challenges.
Positive cash flow indicates that a business is earning more than it spends, while negative cash flow may signal underlying issues or planned investments.
One key to managing cash flow is inventory. When inventory grows, cash is being warehoused and your tax liability increases. To control your inventory, consider getting permission from your vendor to commit to an amount of product for the year but delay the delivery and payment until you need the product. Vendors will often agree to this plan since they usually have a greater cash capacity than small companies.
In addition to hindering cash flow, excessive inventory increases the risk of product damage. Manufactured products need close monitoring to avoid visible deterioration. Managing your inventory is a constant balancing act since you want sufficient inventory for sales while avoiding excessive stockpiling.
As a business owner, you might ask, “How can I decrease the time between the outflow and inflow of cash?” This turnaround time is one of the most common stress points in business. What if every time a dollar comes back it brings a dime, but this only happens once a year? What if that dollar always brings back a nickel, but this happens three times a year? Confusion is common when the cash is flowing, but the business owner does not know where it comes from or where it is going.
STRATEGIES FOR MANAGING CASH FLOW
You can manage your cash flow by implementing several key strategies.
1. Create a Cash Flow Forecast. Develop a detailed projection of cash inflows and outflows for the upcoming months or year. This helps you identify potential shortfalls.
2. Accelerate Receivables. Speed up the collection of accounts receivable by:
• Offering discounts for early payments.
• Setting clear payment terms and following up promptly on overdue invoices.
3. Manage Payables Strategically. While paying suppliers on time is important, avoid early payments unless there are discounts involved.
4. Control Operating Expenses. Identify non-essential or low-value expenses and cut them where possible.
5. Maintain a Cash Reserve. Set aside a portion of profits as a contingency fund to handle emergencies or unexpected opportunities.
6. Secure Financing Options. Establish lines of credit or maintain relationships with lenders to ensure access to funds if needed.
Managing cash flow is not just about tracking money; it’s about ensuring that your business remains agile, resilient, and prepared for the future. By implementing sound cash flow management practices, you can enhance your financial stability and position your company for long-term growth.
Regardless of size or industry, every business must have effective cash flow management as its cornerstone.
CONCLUSION
Leadership in a downturn is about much more than just managing through tough times—it’s about inspiring hope and positioning the organization for future success. Through realistic assessment, innovation, creativity, accurate job costing, managing overhead, and strategic cash flow management, leaders can help their organizations not only survive a downturn but also thrive in its aftermath.
As we have seen throughout history, companies that navigate crises successfully often come out stronger, with a renewed sense of purpose and a greater capacity to succeed in the long term. In the end, it’s the leaders who maintain their integrity and adapt to the changes that truly set the stage for success—no matter how uncertain the future may seem.
Ken Nisly and John Zook are business advisors for Gehman Accounting.
