Why do they do this ? - when it has been well-documented for many decades – for centuries even - that it’d be far FAR safer for them and for their businesses – and for most of their people - to be focusing on pulling back speedily – albeit in a thoughtful and enlightened-self-interested manner - on their Direct and Indirect Costs, in order to be able to protect the bottom line Net Profitability, and most importantly the inherent Positive Net Cash Generation

A relevant case study

The Background - A long-established and previously highly-successful plumbing contracting firm with approx. 70 employees and approx. £6m turnover, had done it all absolutely wrong during the earlier stages of the current Recession / Depression, and was suffering serious long-term damage and major problems – and danger - as a result 

The Owner / Founder / Chairman / CEO, who with his family had done an absolutely amazing job in starting and building and developing this significant enterprise, found himself with a sharply-reduced (by approx. 50%, ie down to approx. £3.0m) sales turnover as the recession began to bite hard and deep, particularly in the construction sector

The problem - The said Chairman / CEO over-rode the advice of his fellow directors, (all of whom were full-time executive directors), ie they had no Non Exec input, and similarly of his internal accountant and external accountant, who had all advised early and major cutting back on direct and indirect costs, (and yet avoiding Compulsory Redundancy wherever possible), but he was adamant that such cutting back was neither necessary nor desirable, as the firm had scampered pretty well unscathed through the previous recessions of the early seventies, early eighties and early nineties, and he was “not about to now be laying off key people, or pushing through any pay reductions”

In essence, he felt that he could trade through the problem, as he had done largely successfully in previous recessions, and that he could and would get the turnover back up again speedily to somewhere around the £6m mark. He did not take the view that this latest recession was really in any way different from the earlier ones, despite the glaring evidence of a much larger %age drop in turnover than he had seen in previous recessions, and of the much longer duration of said turnover reduction

The analyses - At the point at which the OMSG Non Exec Group were asked to assist, the firm was having very real difficulty in paying its weekly and monthly wages and salaries, and similarly in paying its key suppliers monthly, notwithstanding the fact that the company had in place considerable financial support from its bankers. At that said point though, the bank had said that they were not prepared to assist any further beyond their then-existing commitment   

It was relevant also that various key materials suppliers had begun pulling back on their credit terms, in many cases from 60/90/120 days to 30 days, exacerbating the cash flow problems significantly (much) further     

The MD was still adamant that he could see the thing through, and rather than, at the very least, imposing a recruitment freeze, he was in fact taking on further high-quality people as they became available unexpectedly !

The action - It didn’t take long for the appointed OMSG Group Non Exec, working in close consultation with the MD, and with the other Executive Directors, to establish and confirm that serious and most urgent cutting back across the board was indeed an absolute essential if the business was to survive in any sustainable form whatsoever, even in the very short term

Absolute proof was provided for the Chairman / CEO from the OMSG Group Non Exec, using a vastly-simplified financial-modelling tool covering 36 months of future monthly P & L, Monthly Cash Flow and Monthly Balance Sheets, which he (the Non Exec) had built up himself, from a standard OMSG Non Exec Group template - this to confirm totally and absolutely to the Chairman that financial and corporate suicide was indeed being committed

The outcome - The management of the business just had simply no choice but to now cut seriously and deeply right across the board, and far more so than would have been necessary had they acted earlier, and to thereby replace monthly net losses at the firm of £30/40k, with monthly net profits of £30/40k, and to then have the discipline to leave those net profits in the business, in order to survive, and to reduce steadily over time the working capital requirement of the business

The moral of this story / case study - Having a strong-minded, independent detached objective and highly-experienced and expertised OMSG Group Non Exec on board right from the start from years earlier could and would have made all the difference to the Chairman / CEO - and to the Executive Directors – and to the staff - and to their business - and to their peace of mind ! 

• This in order to be able to be analysing monthly with the Chairman and Directors - and clearly and speedily - the detailed nuts and bolts of all of the perceived strategic and tactical problems and opportunities within their business
  
  
• And, to be discussing and examining with them - and validating and proving appropriately - the relevant and workable alternative strategies and tactics with which to deal successfully with those problems and opportunities
  
  
• And for the said OMSG Group Non Exec to be willing to commit to stay with and support the client firm and all of its people throughout the whole of the three or four years involved, (if of course that were to be their wish), and to be planning with them and then supporting (and cajoling) them through the various implementation stages of the changes which had been jointly discussed and agreed
  
  
• And, to then be working with them to be growing the business once again strongly and safely for the medium and long term
  
  
• And, to provide the business owners with a massive Return on Investment on the outlay of fees to OMSG Non Exec Group for the services of the said Non Exec - of some 30 times in Year One alone  !

And, Yes, we would say all of that wouldn’t we !  , ,,,,,,,,,,,,,,,,,,,,, but true it is !

More next month, on another topical issue for SME businesses

July 2011

©OMSG Non Exec Group Ltd – 2011