Five rules for building a resilient business
Five rules for building a resilient business
Wednesday 26 October, 2022
Everyone in business knows that tough times are part of the financial landscape. Downturns have happened before, and they will come again. How do you strengthen a company to withstand the coming pressure? Is it possible to set a business up to thrive when the economic landscape shifts?
Three people with business crisis experience are Bryce Davey, commercial partner at Tompkins Wake, Jono Peart, a partner at Deloitte, and Geoff Hutchison, Managing Director of Backdoor, New Zealand's largest surf, skate and streetwear business.
With over 50 years of experience between them, they know how to build a resilient business.
Recognise when things are slowing down
The sooner you know a downturn is coming, the more time you’ll have to prepare for it. For Jono, he says it’s important to be vigilant and watch for the right signs of economic change.
“Business decision-makers often rely too heavily on economic data or GDP, but this data is always retrospective, it's always three months after the fact. You’ve got to stay ahead of the curve. To spot the downturn early on, you need to look at what’s coming down your own industry pipeline. Is revenue slowing? Are enquiries down?
“My advice is to have conversations with others in the industry, ask your colleagues what they’re experiencing. People on the ground will be the first to notice trends, so stay connected, reach out and be willing to share information with others.”
With Backdoor, Geoff saw the 2007-2008 Global Financial Crisis (GFC) coming by constantly monitoring the factors that drive his business.
“As the GFC started to emerge, we kept an incredibly close eye on our day-to-day sales numbers. As a consumer-facing business, that's our first indication that things are starting to turn rough. Other sectors will have different KPIs, but whatever’s the lifeblood of your business, monitor and measure it frequently. The more monitoring you do, the sooner you’ll spot problematic trends. Once you’ve got the facts, you can take action to prepare.”
“Spotting an economic downturn is all about information. What information do you need daily, and how will you get it? If you don’t have good information, you won’t see the storm coming.”
Another practice resilient companies engage in is scenario planning. This involves considering a series of scenarios, ranging from worst-case to best. With three-to-four scenarios mapped out, you can stress-test your key business statistics to determine your points of weakness.
This scenario planning points out issues that become action points for mitigation. Then you have a series of plans which form the basis for a series of storm-proof strategies.
Get people on your side - early
When economic pressures come on, it’s normal for business people to feel isolated. In truth, there are a group of key players who have a vested interest in helping your business grow: landlords, suppliers, and banks to name a few. Rather than keeping them at arm’s length, Geoff’s approach has been to bring them in and turn them into a support team.
“When times are tough and cash is becoming a problem, we negotiate with our suppliers, and we do it early. We go to them and say, ‘We’re in a situation. Things are going to be tough through winter, so we need terms until Christmas, then we'll come, right.’
“We take the same approach with our bank. We engage them early to see if they can push out some payment terms or do something else to keep cash in the business in the short term. If you’re upfront and early with people, they tend to respond well, especially when you present them with a plan of how you’ll trade through.”
Bryce’s caution, however, is that when working with key partners, it’s important to be realistic with your forecasts plans in order to maintain trust.
“In a desire to bring key advisors and supporters on board, business people can tend to develop forecasts that are wildly optimistic. They give best-case scenarios to the banks and suppliers but then fail to deliver. That damages trust. When key stakeholders reach a point of no longer trusting the management, you're going to struggle.
“It’s far better to be as realistic as you can from the start. If things turn out better than forecast, you’ll win more friends and build more trust.”
Use specialist advisors
Every business is the sum of many interacting parts. While it may be convenient to bring in a single advisor to help strengthen the overall performance of a company, it’s best to engage an expert team with specialists in key aspects of your business. For Geoff, this was certainly the case with Backdoor during the GFC.
“Rent is a huge cost in our business model, and I wasn’t good at negotiating leases. Neither were my initial advisors. We'd get all the clauses and details of the lease right, but we lacked the knowledge of what our industry paid for at specific shopping centres.
“Then a fellow retailer put me onto a lease negotiator he was using. The negotiator was an older guy that specialised in this area. Because he understood market rates and the leasing system, he got us significantly better arrangements. That has made a crucial difference to our growth plans.”
Jono agrees. “Don’t have one adviser doing everything. Use different experts who can help with specific aspects of your business. And make sure you get people who are straight shooters, who can give you options and good ideas. They'll quickly see where further expertise is required that they don’t possess.”
Focus on profitability
All businesses manage their costs, but resilient companies focus more of their attention on growth. For these firms, growth is not measured purely by production, but by improved profitability.
With over 15 years helping clients develop their businesses, Jono knows the importance of profit and the role that margins play.
“100% margin will get you through in times of volatility. If you have margin to play with in terms of price range, you have more flexibility to ride out of storm. But if you've got tight margins, the smallest thing can tip you over.
“Running profitably is such a key part of business strength: you have to know what can make you more profitable.”
Geoff knows the truth of this from experience.
“When I think back to the GFC, our net margin at Backdoor was around 23%. As Jono said, it was so tight that when things got tough and the sale numbers dropped, boy, we almost went under.
“We since negotiated better deals with suppliers and landlords, and our margins are now significantly better. Backdoor is in a much stronger position to withstand an economic downturn now than we were back then.”
Check out Tompkins Wake's podcast Off the Clock for fortnightly releases of our Building a Resilient Business series.