How to manage in a downturn: Strategies for entrepreneurs

Setting aside their original blueprint for growth agenda, three prominent entrepreneurs, guest speakers on Ernst & Young's October 14th Thought Center Webcast Strategic Growth Leadership Series, agreed to engage instead in a candid discussion on what entrepreneurs actually can control and manage in a time when they can't control the economy. Returning again and again to two key areas where business owners can manage and lead - tightening up their balance sheets and communicating regularly with their own people, suppliers and customers - the speakers agreed that current conditions provide a great opportunity for managers to demonstrate their own strengths and the strength of their companies.

Moderator Debra Norville, host of Inside Edition, set the stage for the discussion by asking her guests where they thought the economy was going. Richard E. Caruso, founder and Chairman of Integra LifeSciences Corporation, sees continued volatility, at least for the next few months, followed by stability. Panelist Robert Scott, whose company, wifi maker Colubris Networks, was acquired by HP just days before the webcast, didn't make any specific forecast but emphasized that a company can get through anything if management goes back to basics. "Focus on the right people, the right product and the balance sheet and you can get through anything."

Howard Levitt, President and Chief Executive Officer of Tourneau, Inc., the nation's largest luxury watch retailer, expressed concern about the mood of the consumer. "The consumer is distracted by the news right now, is assailed by it. While international cooperation is a good sign, I don't expect a big upswing by Christmas."

Finding Capital

One obvious question in the present credit crisis, Norville said, is how will business owners find capital to manage operations. All of the panelists, including Bryan E Pearce, Ernst & Young's northeast strategic growth markets leader, agreed that the first place to look for capital was in the business itself, from the balance sheet, in adjustments to inventory, and in receivables. Companies have a lot of cash locked up in working capital, Pearce said.

Other sources of capital could be the large commercial banks, which Caruso thinks will soon begin lending, but only to their best customers. Banks will not be willing to start new relationships, in Levitt's view. Venture capital and companies with cash like his own will be looking to make acquisitions Caruso said. For some companies, like Scott's Colubris, being acquired by a larger company will be the source of capital.

Controlling expenses is another necessary step in freeing up capital from within the business, but the eliminating headcount has to be balanced with other initiatives such as managing inventory or deferring capital investments, Levitt emphasized - in his case remodeling a store or deferring product development.

Strengthen Sales and Marketing Message

In a weakening economy "it is essential to return to the DNA of the company" in your marketing message and in internal communications with your sales force, Scott said.

Maintaining marketing confidence internally - and communicating to "buck up the troops," is critical, Levitt said. In the case of his own company, "A customer told a salesperson in one of our stores that it was a buyer's market and the salesperson should be giving him a discount. The salesperson told him, 'Our business is fine.'"

When Norville asked if companies should spend money on advertising, Scott and Levitt said the same thing. "You do not want to go dark." You have to advertise through a downturn to maintain your presence in the marketplace.

Managing Cash Flow and Profitability

Yet another area where regular communication is essential, Pearce said, is in managing cash flow, especially receivables. "You have to stay in touch with customers . . . you have to stay out in front of the problem," he said, adding that if you decide to extend a credit or a discount to a client you might want to consider building a price increase into the arrangement. He recommended that managers get as much information about their customers as possible. Wherever possible, get copies of their financial statements.

Panelists agreed that sales compensation adjustments would likely be made in many companies. The base will be cut, and incentive increased. It is also possible to tie compensation to collections.

Where to Go for Advice

Entrepreneurs will be looking for advice in these difficult times and Norville asked her guests who they will be talking with, what kinds of resources they will use for information.

Boards of directors can help with their wide range of experience. But it will be a time to recruit the right board with the right expertise, adding more people with financial, not just operational expertise. Caruso's company evaluates its board each year. Scott added a secondary committee of additional advisors that met twice a year in a venture he headed before Colubris.

Caruso is also interested in what people on the street are saying. He asks the next person on line for coffee how his business is going. Generally, he says, the answers will predict movement in the market. For Scott the collective intelligence model is compelling. Levitt goes into his stores and watches customer behavior.

The Importance of Leadership

There is no question that CEOs can demonstrate leadership in these times, Scott said. A leader has "good people skills, is a visionary with a sense of direction . . . you have to lead with inspiration and passion."

Levitt thinks that the CEO has to "get out and communicate - technology is good but you need eyeball to eyeball communication with your employees . . . a leader is humble - it is all about the team."

Planning

When asked about planning, the two panelists who are managing their companies, Levitt and Caruso, said that companies must continue to plan. Levitt said he uses two planning models, an easy and stretch model, and usually ends up accomplishing some of the stretch. "While it is necessary to plan beyond the volatility, this is not a good time for new product," Caruso said, "because market data is not going to be reliable."

And depending on the business and what the market is, this may not be the time for a startup, he added. "You should hang on for proper funding or if you have the cash, look to acquire other companies." At some point in the future, the playing field will be less crowded with companies trying to do things cheaply and the time will be right for a new entrant.
 

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