Moving Forward Through Economic Decline

  July 10, 2020

  Read Time: 6 MIN 00 SEC

Ideas for Expenses, Incentives, Planning and Funding a Stronger Tomorrow
What financial leadership moves come to mind when you think of an economic downturn? Cost reduction? Limited CapEx? Cash flow optimization? Workforce efficiency?

Those can be important steps for getting control in a down cycle. But what about going beyond stabilizing moves to planning some transcendent and disruptive growth strategies? Do those even have a place in today’s ultra-challenging business environment?

Consider this: when navigating uncertain parts of the cycle, it’s easy to assume the ‘all cuts all the time’ approach to financial decision making to achieve long-term company health.

But without the right strategy, cost reductions now could have unintended negative effects on your long-term success. Here are a few things to think about before you cut.

To Cut or Keep
There is little doubt the first actions taken during a time of economic decline are ensuring your cost and operating infrastructure meet the challenges of the road ahead. Moving forward, however, will require a smarter approach, one focused on losing fat and feeding muscles.

  • A retailer might limit SKUs, reduce square footage, and exchange shelf space for more of its own brand’s higher-margin alternatives
  • A manufacturer might re-evaluate low-margin, commodity-like, labor-intensive production lines in favor of specialized contracts with more supply chain flexibility
  • A services company might find savings in a call center management system that requires fewer touches to route calls and inquiries while refocusing employees on revenue-generating activities

These examples also illustrate that real transformation requires more than just cost reduction. It also demands feeding your muscles. Redeploying capital to areas more likely to yield return as a result of cost-saving and efficiency decisions goes beyond expense management and positions a firm for a brighter tomorrow. And don’t spend all your time in the income statement. Work the balance sheet as well. Whether it’s a new ownership model or CapEx strategy, the secret sauce is effectively managing strategy shifts in both areas. There is rarely a path to real health that involves only contraction.

Acting on Incentives
Generally, all companies feel a significant impact in times of a lower-performing business cycle, and no matter how little we can see the big picture, we are not alone. While it is essential to quickly identify business relationships that may be harmed because of the climate, it is equally important to explore the opportunities.

  • A logistics and delivery company may be able to take advantage of deeply discounted new and used fleet asset inventories from dealers and manufacturers motivated by the cycle to move inventory at lower margins
  • A manufacturing company may be able to stock up on raw materials for higher production times to come at a meager cost as commodity prices touch low points
  • A regional supplier of medical equipment may be able to acquire a competitor at a fair, more appealing purchase price with more favorable terms than at the heights of a frothy M&A market

Once you have enacted reasonable cost reduction measures and deployed savings into higher ROI areas, redeploying these savings can help you take advantage of offers, incentives, and opportunities that arise and position you to be stronger than ever coming out of the decline.

Don’t Just Defend – Score
If you study the companies delivering breakthrough performance during and after an economic downturn, they started thinking bigger, earlier. While others were focusing on cuts while hoping for rising demand to lift them out of the doldrums, the outliers pulled themselves out of the depths by pushing their companies faster and further. Companies that win coming out of the cycle ask big questions early:

  • Are we ready to make a bold strategic acquisition?
  • Can we reach new markets with new services and capabilities?
  • Can we evolve our offering to lead the industry with as-a-service offerings?
  • Could new technologies help us deliver superior customer experiences?

Out of the last downturn, Samsung improved its brand value ranking from 21 to 6 in part because of its aggressive investment in growth while competition pulled back. Competitive volatility rose 30%, as measured by the change in both composition and ranking on the Fortune list. Economic disruption leads to competitive fluctuations and, for the ones that go on offense early, an opportunity for transcendent growth.

Funding the Future of Your Business
Thinking bigger when conditions make you want to cut and cut some more isn’t easy. Plus, it requires capital. And not from just one provider: it’s a little optimistic to believe that a single lender can meet all your funding needs while most lenders are tightening credit standards.

Building relationships with specialty lenders can not only expand your access to capital but offer more flexible terms. These relationships may include lenders with expertise in:

  • Equipment lending and leasing
  • Technology lending and leasing
  • Commercial real estate

While you are building your plans for stability now while positioning your business for opportunities to come, it’s vital to engage these lenders early with an advisory conversation. Don’t wait until the plans are already in motion before you talk to finance providers.

Ready to get started? LEAF can help. With a strong track record of helping companies through previous economic declines, our customized, flexible, and innovative approach to equipment and technology lending can help you chart a better path through the downturn and come out stronger on the other side.