Why do so many SME bosses still do this ? - when it has been well-documented for many decades that it’d be far FAR safer for them and for their businesses to be focusing on pulling back speedily, via whatever thoughtful and appropriate means, on to all of their Direct and Indirect Cost lines, in order to be able to protect the bottom line net profitability, and most importantly the inherent
cash flow  

A relevant case study

A long-established and previously very successful plumbing contracting firm with approx 50 employees and approx £3m turnover, has done it all absolutely wrong for the last two years or so and is now suffering serious long-term damage and major problems – and serious 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 quite beautifully this significant enterprise, found himself with a sharply-declining (by approx 50%, down to approx £1.5m) sales turnover as the current recession began to bite hard and deep, particularly in the construction sector    

He over-rode the advice of his fellow directors, (both of whom were full-time executive directors), and similarly of his internal accountant and external accountant professional mentors, who advised major and urgent cutting back on all direct and indirect cost lines, (and avoiding Compulsory Redundancy wherever possible), but he was adamant that such cutting back was neither necessary nor desirable, as they’d 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 even pushing through any major pay reductions”

In essence, he felt that he could trade back up and 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 £3m mark. He did not take the view that this recession was really in any way different from the earlier ones, despite the glaring evidence of a much larger drop in turnover than he had seen in previous recessions, and of the longer duration of said turnover reduction

At the point at which OMSG were asked to advise and 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 it had in place very considerable overdraft facilities, and medium term loans, and debtor invoice factoring from its bankers. At that said point though, the bank had said that enough was enough and that they were not prepared to assist any further, beyond their then-existing commitment     

It was relevant also that various key materials suppliers had pulled back savagely on their credit terms, in many cases from 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 most pointedly, 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 !

It didn’t take long for the appointed OMSG Non Exec, working in close consultation with the MD, and with the two Operations 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      

The outcome ? – Absolute proof for the MD from the OMSG 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 template, ,,,,,,,,,,,,,,,,, this to confirm totally to the MD that financial and corporate suicide was indeed being committed

So, the clear problem here is the lack of realistic focus regarding the depth and length of the turnover drop, no matter that the MD was firmly of the view that he could indeed trade his way up again and through the current turnover downturn

• So, did the MD know really what was going on, ,,,,,,,,,,,,,,,,  and in which case, that he was just choosing to look away, just because it suited his (whatever) purpose to do so

• Or, did he genuinely not believe that he was crashing in to seriously major long-term monthly losses at the bottom line, and that with an immediate and direct knock-on effect on to cash flow and on to working capital requirement 

Well, the answer is that we shall probably never know – but what we do know is that the owner and management there now had a massive problem on their hands as a result of all this unwillingness to cut and deeply, and in an timely manner , ,,,,,,,,,,,,,,,,  and thereby to wildly imperil the immediate and future survival of the business

The management of the business just had simply no choice but to now cut seriously and across the board, and to replace monthly net losses at the firm of £15/20k, with monthly net profits of £10/20k, and to then have the discipline to leave those net profits in the business, in order to survive, and to reduce steadily the working capital requirement of the business

The moral of this story ? –

Well –

• It’d have been very different if there had been a strong-minded, independent detached and objective Non Exec (or Non Exec Chairman) on board – and Yes, I know, we would say that wouldn’t we ! – but it’s almost certainly true, nonetheless

• Management Education, Education, Education, ,,,,,,,,,,,,,,,, and thoughtful Non Exec support to such MD’s / CEO’s, so, come the moment, that they do not react and proceed in ways that are so hugely damaging and so seriously-imperilling to their businesses  

More next month, on another topical issue for SME businesses.

April 2010