Managing Growth Companies in Uncertain Times

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As highlighted during the final days of the 2008 presidential campaign, we are in the midst of a global economic downturn the likes of which many of us have never experienced. Current data continue to reflect a tighter credit environment, lower consumer confidence, less visibility, and greater uncertainty. Even the best-capitalized companies will find debt financing challenging and more expensive to secure. Those companies that do not require additional financing must adapt to a rapidly changing landscape—one in which their customers and suppliers may face capital constraints, cash flow problems, or counterparty risk on a scale never before contemplated.

However, today's daunting environment also can create opportunities for profitable, well-managed, conservatively capitalized companies. In 25 years of partnering with growing companies, our firm has determined that a number of strategies can increase the chances of success during—and following—an economic downturn. With that goal in mind, here are six strategies to consider:

View profits as your most reliable source of capital
In expansive credit cycles, growth financing for working capital or capital expenditures is easy to secure from various financing sources. In a more restrictive environment, however, the operating profit of your business may be your most reliable source of capital. Be sure to forecast realistic growth, and prepare contingency plans which assume no access to outside capital. Track cash flows monthly or weekly, looking for shifts in pricing, margins, accounts-receivable aging, or customers' ordering patterns.

Do not assume debt financing is unavailable
For many growth companies, debt financing is—and probably should remain—a critical and permanent part of the capital structure. As credit spreads widen to historical levels, debt is becoming more expensive. While debt may be more available to well-capitalized companies, it has not disappeared. If your business is fundamentally sound, you should be able to access debt financing, even in today's challenging credit environment.

Pay closer attention to your customers
Two years ago, companies invested primarily in technology to that could enhance revenue growth. Today, they are focusing on investments that generate cost savings with a quick payback and high return on investment. Your customers may be facing capital constraints that impact their ability to buy your products and services. Listen to your customers—and then adjust your marketing message and product positioning to changes in their budgets, strategic priorities, and buying behavior.

Evaluate your resources and capital allocations
A recession forces all businesses to justify every aspect of their investment strategy. Your executive team and board should reevaluate every component of your plan—from innovative technology to new products to geographic expansion. How you allocate scarce resources may determine your success or failure. Recognize that other companies are also evaluating their resource allocation and will likely triage their investment priorities. If your competitors are pulling back, for instance, in a particular product or geographic market, you may have an opportunity to expand at their expense. Market share becomes particularly fluid during times of economic turmoil, so look for opportunities to expand your company's footprint.

Take advantage of newly available talent
The natural response to market turmoil is freezing or even reducing your workforce, but that may be shortsighted. With entire businesses failing and others making layoffs, the supply of skilled, capable professionals will rise—and wages will decline in an efficient labor market. Often, you can hire people with greater talent at lower cost. During downturns, successful companies carefully consider their human capital needs, and look to selectively upgrade their teams.

Consider acquisitions to grow market share
With the structure of many markets fragile or fluid, well-positioned companies now have the opportunity to grow through consolidation. We are advising a number of companies on acquisition strategies, as depressed acquisition multiples create opportunities for stronger competitors to consolidate share and eliminate competitors. Although capital for financing acquisitions may be less plentiful than before, it is still available for well-run companies.

* * * * *
As these six strategies demonstrate, an economic downturn of this magnitude is challenging for every enterprise. However, uncertain times also present opportunities for well-managed companies to capitalize on the dislocation in markets, in competitive behavior, and in the workforce. After the downturn runs its course, these companies can emerge as stronger competitors better-equipped to benefit from the ensuing period of economic recovery. Leadership is the key variable here.

Companies that are able to navigate volatile markets are typically steered by executive teams that share a common strategic view of their business and are like-minded in terms of the principles which guide their decision making. They do not hesitate to make tough choices on people, products, and markets, and they regularly seek the counsel of experienced board members, investors, and advisors.

Last updated: Nov 17, 2008




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