Economic Indicator: Look to the Length of the Lady’s SkirtRose Hightower
April 24, 2009 — 1,802 views
Old adage: "A length of a lady's skirt rises during healthy economic times, and conversely lengthens during bad economic times." It makes for interesting fashion as well as for allowing for a diversity of economic strategies. There is hope and reassurance and confidence that for every fall there will be a corresponding a rise.
No matter how dramatic the swings of economic prosperity or recession might be, there is always a need for those to monitor and report on the results. Good Accounting and Finance Managers know how to "go with the flow" and adapt to changing times and client needs. Great Accounting and Finance Managers use this time to leverage the skills and experience of their accounting staff.
They might look to projects to evaluate and consolidate core competencies, centralize operations and reconsider investment spending. Acknowledge this economic period as a normal part of the ebb and flow cycle and find the advantage and opportunity.
During periods of growth, companies are more willing to take risks to see if new product and market opportunities will pay off. This is a time for a more open spirit and wallet. Investments in product and market innovation, strategies to merge and acquire "missing segments", form creative partnerships, decentralize operations are characteristics of an expanding economy or a company sure of itself and its place in the economic hierarchy. Use periods of economic expansion to keep up with industry growth and extend your reach.
Therefore it is also logical that during times of economic, political or financial transitions, company strategies call for a retreat to protect their core strengths and hard won gains. Now may be the time for reflection and evaluation but not for inaction. Now is the time...
- to be confident about your core strengths, for the company, your staff and yourself. If you are not confident about them, then assess and evaluate.
- for leaders to revisit their company's vision, mission and goals - Don't glaze over, it is a strategic opportunity to redirect scare resources and map a more direct route to what is really important.
- to carefully evaluate and rank product and service strategies and the profit contribution of each line of revenue.
- to carefully evaluate and rank investments, costs and expenses associated with each line of revenue and your infrastructure to support those efforts.
- to carefully evaluate and balance your balance sheet using the traditional ratios.
- to evaluate the skills and contributions of employees by role and responsibility.
Now is the time to review, rate and rank. Acting without reflection and evaluation is panic. Now is not the time for panic.
Visualize a person with binoculars or blinders, only focusing on what is in front of them. When the (stock) market is rising, the sky is the limit with no end in sight, everyone is looking up. When the (stock) market is declining the fall seems endless and every signal screams doom and gloom. There is no way to look both up and down at the same time and there is no horizon to gauge the rise or fall.
During times of growth and to scale up to meet the necessary processing activities, strategies abound with requests to increase headcount, build empires, move skills and processing to lower cost locations or outsource. If during this time when growth seems boundless, you can remember growth is one part of the cycle, then you can prepare for scaling down with little pain and penalty.
During times of growth, there is a good case to be made for decentralizing operations; having decentralized operations means that more power and visibility is directed to the individual product business units and regional processing hubs. Decentralization means being closer to the marketplace and customers which means that reaction time is quicker and customers are happier.
Additional strategies and benefits for building a case for decentralization include:
- the transfer of individual skills and ability to strengthen relationships and resources between corporate and non-corporate locations. The purpose is to reinforce the message that individual locations are part of the bigger organizational family and to remind those with a corporate-centric view that without those segments corporate is just "overhead and underfoot".
- the encouragement of cross functional and cross geographic sharing by integrating best practices enabling best company practices to become transferable making the company as a whole more efficient.
- the advantage of moving to lower cost facilities and employing lower cost resources for standard transactional processing needs. Corporate operational facilities are often located in or near cities which command higher real estate and salary levels. By evaluating relocation costs or even considering the cost / benefit of outsourcing the company may realize a cost savings. Caution, employ a complete make / buy decision analysis and consider the payback period for the move because you know this is only one part of the economic cycle.
- the capture, assessment and sharing of local documentation for procedures and decision making techniques. Bottom line, you are reviewing, rating and ranking to find the best of the best and deploying that across business and geographic units. Note: Best of the best is not the same as best practice; it is an accumulation of the best parts of the best deployment activities.
As you monitor the prosperity ebb and flow cycles, you should see signals that the cycle is reversing. With the lack of attainment to sales and profit targets, you should prepare to adjust production and inventory levels, discretionary spending as well as staffing and resource levels. Keep an eye or two on cash flow.
As with all cycles, the economic ebb turns and the cycle calls for a reversal of the above strategies with equal benefits waiting to be realized. The decentralized strategy now calls for a preferred centralized strategy with its own advantages.
- Recognize, reward and promote regional individuals to corporate while bringing, the world view home. There is an opportunity to revisit staffing structure and levels and succession planning.
- Act to consolidate and protect core product and geographic competencies. Review, rate and rank the Company's better and best selling products. Create a Company "best practice" library by comparing which location performs the standard back-office procedures best.
- Divest or shut down less profitable, less efficient product lines and less efficient geographic locations.
- Centralize and standardize policies, procedures and decision making. While it is always a good time to perform maintenance on your documentation program; during times of economic downturn, communicate the best of the best practices globally and plan for implementation.
Once you realize that this is a cycle due to be repeated at regular intervals, use the lessons learned from previous cycle transitions to improve how you handle this one. Who was in charge then and what actions proved to be successful and which were not successful? By forgetting or not acknowledging the past, you will be doomed to repeat it.
Investment spending covers more than just marketable or asset investments, it includes the monitoring and control of cash.
Although I am not a big fan of committees, it is important that a group of cross functional and cross geographic representatives come together to discuss strengths, weaknesses, opportunities and threats. These get-togethers must be held at regular intervals; I recommend at least quarterly, with the agenda items and results documented and acted upon.
It is wise to always have a tight and short leash on investment spending; however in times of a downward transition the leash may need to become a choke collar. If you don't already have the following types of reviews and approvals, consider implementing them. If you have them make sure they are working effectively by comparing the current results with the decisions made.
- Investment committee with different criteria to address proposals for new and/or additional: product research and development, new market development. infrastructure ventures including real estate, facilities and information technology
- Pricing committee to ensure equal and consistent pricing and discounting for products and services.
- Headcount committee to address right-sizing skill and salary standards by role, responsibility and location.
- Merger, acquisition, divestment committee to address long term strategic initiatives.
- Policy committee to ensure that company strategies, direction, policies, procedures and communications are generated from the top and are consistent "on message" throughout the company.
The result of investment strategies make themselves known and felt through the financial statements. Consider developing an investment index by incorporating the major investment measures; e.g., return on investment by asset type, cost of funding and/or financing by project. In more sophisticated environments attach a weighting to each measure to arrive at a composite. In less sophisticated environments use the textbook ratios and compare them to history. Plot the company's ebb and flow economic history against these ratio indicators. Use the Financial Statements:
- Income Statement companies focus period growth and profit attainment. From the 1960 - 1980s it could be said that was the period of the Income Statement or Profit and Loss statement; with all the investment analysts measuring everything based on revenue and profit.
- Balance Sheet companies value the balance to ensure the right mix. During the 1980s to around 2004 it was the age of the Balance Sheet with the investment analysts following like a herd to understand the balance sheet story and ratios.
- Statement of Cash Flow companies focuses on being lean and mean, poised to take advantage of an opportunity. Since 2004 the Statement of Cash Flow has become king; separating out the amount of real cash earned and spent from additional cash acquired or divested. If you are not already doing it, implement a running statement of cash flow using at least two (2) historic periods, the current period and three (3) projected periods. The age of the Statement of Cash Flow is here and you need to have a person well qualified in preparing and analyzing its hidden messages and opportunities.
In my opinion, understanding and using the story behind all of these statements in concert is critical for diagnosing the health of the business. There is no one easy, quick, symptom to look for and no one easy, quick fix. Being able to read your company and your industry is the difference between success and failure.
The hidden pearl of wisdom
Underlying all of these strategies: core competencies, organizational structure and investment spending is process and documentation. If there is only one thing you can implement at this time, it should be process documentation. Implementing a good documentation program adds more than just compliance; it revisits processes, forms, workflow, authority levels, roles and responsibilities. Standardizing the basics streamlines the company to glide through the bad times and strengthens it for the good times.
Remember this is a cyclical occurrence and look back to review and analyze how you handled the last one. Learn from that experience and adopt a careful approach to the next phase of the cycle. Your chief accountant is your best resource in providing understanding, insight and perspective on the results you are currently seeking.
Use this as a time of action, not panic. Regroup to build on your core strengths and run your business with purpose. Use this time to fill in the blanks especially for process improvement and documentation.
As with the lady's skirts, it is not a time to be revealing and whimsical but to strength and confidence in making the difficult decisions. Embrace a style where you can be enticed by the character and form without giving it all away. Remove the blinders and enjoy the view.
I'll leave you with another old adage: Be prepared.
To assist with or assess documentation programs refer to the Accounting and Finance Policies and Procedures or Internal Controls Policies and Procedures manuals published by John Wiley and Sons and available on Amazon.
Rose Hightower is an accountant, professor, author and owner of IDEAL Consulting Solutions International, LLC. She earned an Accounting degree while in Canada and a Master's degree from Syracuse University. Rose has lived and worked in Toronto and New York.
IDEAL Consulting Solutions International, LLC, is a firm specializing in consulting in implementation of internal control policy and procedure programs for companies. Bringing over 20 years experience from IBM and as a finance manager and providing service as a consultant she and her staff, provide practical lessons and simple solutions for any size company. She is known as ‘The Policy Guru' and offers advice to clients via website www.idealpolicy.com,