The first step is to acknowledge it when sales shrink. The second is to make the tough calls on where to cut.
From: Inc.com By: Gary Pudles
In looking at acquisition opportunities over the last eight years, I have seen a number of companies forced to put themselves up for sale because they failed to manage downturns in their businesses properly. Or, they failed to manage their businesses well when sales expectations were not met. It is important for CEOs of fast-growing companies to remember to manage their businesses downward when sales shrink (even if only temporarily), or when revenue opportunities are limited in unexpected ways.
There are many reasons why a fast growing company's sales can shrink. In my own industry, here are a few examples:
In each case, these companies failed because their CEOs refused to cut expenses as their sales shrunk. These CEOs continued to believe that the sharp revenue drops were only temporary and that a new sale or success strong enough to save the company was just around the corner. They were convinced that if they did little or nothing that their next sale would be large enough to support the people and infrastructure that had been built when they were rapidly growing. In reality, these leaders refused to read their own monthly income statements and take corrective action. This lack of decisive action and disciplined leadership ultimately caused each one of the CEOs to lose their companies.
Each of these CEOs could have saved their companies if they had only been willing to do the difficult task of cutting expenses from the company. While each had done some cutting, none of the CEOs came close to cutting enough to save their companies. In each case, fear of reducing or eliminating the wrong thing or person also played a role in these CEOs inactions. At one of the companies, the CEO was so afraid of cutting the wrong person, he just failed to cut anyone and convinced himself that it was only a matter of time before things got better.
Deciding what needs to be reduced is often the hardest step whennecessary cuts include people who helped build the business in the first place. This is particularly true in the call center examples above because salary and benefits are the biggest expense and the easiest savings are generally at the top of the organization. In each of these situations, the companies needed to eliminate lots of people to survive (mostly in management and IT) and in two cases, new owners came in and terminated enough people to keep the companies in business.
Once you decide that people need to be cut, figuring out who these people should be is excruciating. The hardest part of being a "boss" is having to fire someone. It's worse when the person being fired has done good work for the company. Despite tenure and performance, maybe their job function is just not needed in a scaled down company. Or you have two people doing the same work because of the size of the company and while one person is good, the other person is better for a smaller group. One of the hardest days of my business life was when I had to terminate 39 people in one day because the company they worked for had run out of money on the day I acquired the assets and none of these managers would be needed in the scaled down company (not a single phone agent was terminated).
Other areas that are often targets for cutting include real estate or facilities and IT. As a company scales back, its need for space scales with it. In each of the situations described above, I remember the sadness of walking into call centers with lots of empty chairs and idle computers. There is no worse reminder of a lack of sales and a lack of success than empty call center seats.
In the IT area, as a company grows, it is often able to get people with specialized skill sets that smaller companies just can't afford. Often CEOs are afraid to eliminate specialists or attempt to "dumb down" their IT infrastructure despite the obvious fact that the company can't afford to keep the specialist or the specialized infrastructure. In the first example above, the CEO kept a $1 million per year programming team in place even though the amount of programming needed outside the abandoned niche would never be close to what had been needed for the former customers. In the second example, the company retained a six-person IT team that was immediately scaled down to two people when the company was sold.
The key to successfully managing a company when sales don't meet expectations is to make decisions quickly and to manage to the "what is" and not to the "what will be". Also, be prepared to review every expense (whether it is a person or a service) and ask yourself: Is this really needed in a smaller, scaled down company? Hopefully, none of you reading this will ever have to ask that question.