Managing in a downturn: three key areas of focus that management could consider in managing risk

Managing cash flow is vital to anyone’s business, especially in a downturn: any company needs to be in control of its own cash flow. You may already know that, in a downturn, your stakeholders are looking at your costs like they never have before; this is the best time to be proactive and think strategically about cost.

Here are three key areas of focus that management could consider in managing risk:

1. Understand your own data. Going through 50 pages monthly management accounts does not help you control your business. Reduce the report to an ideal 1 page summary which covers all of the key performance indicators that you have agreed as being significant to your business.
2. Settle clear ownership. Customer services, production, procurement, finance – each believe they have a right to control the cash in their domain. However, you should consider that none of them have a holistic view of your business requirements. Management of cash should clearly be stated as the responsibility of the CFO and/or the board of directors.
3. Communicate effectively with all stakeholders. On the one hand, for example, your staff need to understand that appropriate credit control is an important part of the customer experience, even if the payment is not going to be made to terms. On the other hand, as we all know, banks do not like surprises. If you will be able to predict difficulties in cash collection, you should be able to manage the banks’ expectations as well.

All the above may sound like common sense, but you would be surprised to find out in how many companies this is not a common practice. If you have decided to handle cost more strategically, here are some simple practical tips on how to do it:

  • correctly identify the drivers of cost in your company: ask yourself if there are areas of your company and cost that are destroying value;
  • improve the processes around those areas or simply eliminate the cost.

However, you cannot always take out costs quickly, as major projects may be on roll. If this is the case, you could take a more measured approach:

  • in the first phase, look at your major project spend and ask yourself what can you do differently; have a look at your supplier agreements, some of them will allow you some space to take long term decisions;
  • in the second phase look at your own levels of bureaucracy and simplify procedure to the extend of compliance and operational efficiency;
  • in the third phase, re-analyse your project and look for its competitive strength or even opportunities. The business world is moving and, since the first two phases could take from a few months to years, depending on project extend, you could redefine it in terms of new market opportunities.
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4 thoughts on “Managing in a downturn: three key areas of focus that management could consider in managing risk”

  1. I support the 3 areas mentioned and would like to take a broader view, not just cash but in running the business. I would add a documentation component to each.
    For example consider:
    1) Is there a Chart of Accounts with definitions, descriptions and examples of how each account is used
    2) Is there a process matrix identifying who has ownership of the business transactions with their financial, legal and HR support?
    3) Is there a communication roadmap and schedule?

    Rose Hightower

    1. Tight controls regarding cash flow should be in place in any organisation in order to avoid wasting money regardless of the external market conditions.
      Each department should have a budget that meets the requirements to run the business. Managers should manage their budget carefully.

      Management of internal resources is a skill and a strategic component for running a business.

  2. I absolutely agree with Rose, cash is important and in many cases the chart of accounts are setup but I have seen many failures along the line of : absent of a process matrix with clear & defined ownership and accountability guidelines. Lack of communication and confusion of communication has caused a major blow to the Risk Mitigation process

  3. The issues you refer to are now intrinsic across the board and nowhere is this more apparent than in the banking industry where regulators are taking a proactive stance. There has been a lot of discussion around how risk management must change in light of the financial crisis. First and foremost risk managers need to understand where risk models underperformed during the credit crunch and what the lessons are for best practice going forward. At the heart of the previous failures in risk was arguably not the systems themselves, rather the data upon which they relied. As well as uniting data with a single universal truth, risk managers must lead the charge in reconciling risk with regulations, ensuring the internal and external stories match. They must also extend the parameters of their risk models, allowing for a far greater number of factors.

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