Just when you thought you could see the light

Forget the economist’s definition, you know that you are in a downturn when you don’t get orders from the people who don’t pay you, says John Dewhirst

Exactly where is the economy heading? The general consensus is that things are better than they were six months ago even though we are far from the buoyant conditions of the late 1990s. Anecdotal evidence is mixed, even within the same market sectors.

A common theme is the relentless pressure on margins and a high degree of uncertainty. There’s over-supply in the market relative to demand and this will result in corporate collapse and most likely further consolidation and concentration of resources.

WPP Group and Cordiant Communications Group have grabbed the headlines as a result of their size, but don’t bet that their experiences won’t be repeated among smaller players. With falling workloads, volumes and prices, a considerable number of medium-sized design businesses will disappear, following the likes of Basten Greenhill Andrews into the industry archives.

But don’t ‘hunker down’ and hope that the bad news will go away. Instead, revisit your business model and core assumptions about how you intend to survive and prosper. The days of getting intoxicated by fee growth, expansion and office openings are over. Strategies need a reality check and design groups are already learning that they can no longer afford to be precious about the type of work being undertaken or the minimum fees that they will accept.

The industry has to face up to the decline in productivity and the mismatch between design prices and designer wages. Until it does, there’ll be little sympathy from lenders for company rescues.

There are three fundamental lessons to be learned about business failure. The first is that failure is due principally to a lack of cash rather than a lack of reported profit (cash is a matter of fact while profit is a matter of opinion). The second is that once a business is on a trend of under-performance, there is often a rapid acceleration into crisis and ultimate demise. The third is that business failure is rarely due to a sudden or unforeseen catastrophe – time and again the same shortcomings lead to decline: defects in management, inadequate financial systems and controls, over-commitments and strategic or structural deficiencies.

In smaller marketing businesses the calibre of financial management is generally poor. Common themes are the failure to recognise the importance of cash-control and the failure of management in under-performing businesses to appreciate the concerns of their stakeholders.

Put simply, you must build trust, maintain confidence and ensure that stakeholders understand what management intends to do about a situation. Broken promises, unwelcome surprises and a lack of communication do not achieve that objective.

Ask yourself whether the internal assessment of your business is sufficiently objective. If you don’t have that assurance, or if you don’t have the necessary clarity, then you need someone to ask the right questions and challenge your assumptions.

A fresh pair of eyes is also useful to assess the suitability of your management information, financial systems and controls. Accountants are often the last people to adopt new ways of working, despite the fact that the role of the finance director has changed considerably in the past decade.

Know what’s expected of you in today’s economy. A robust business plan with a clear definition of priorities, responsibilities and timescales is the basis for galvanising your people, as well as plotting a turnaround or new strategic direction. That strategy has to have compelling logic (a credible argument for what a company is going to do, and when, and why it thinks that such an action is possible), compelling vision (an image in people’s minds of a future that engages their interest and their motivation) and last, but not least, compelling reasons for ongoing support from lenders.

Get an integrated financial forecast (one that links a trading account with a balance sheet and a cash flow) as well as a stand alone short-term cash flow forecast, if you haven’t already. If your business is unable to pay its liabilities when they fall due and your balance sheet discloses net liabilities, you should definitely seek advice.

Banks are more supportive than they were ten years ago, but ultimately you can expect a lender to appoint independent reporting accountants if he is unsure of his security. This can often lead to a marked deterioration in relations – not least because the cost of such an exercise can be quite considerable (and you will have to pay).

Design groups have had it tough over the past couple of years. To have survived so far is no mean feat. But here comes the tricky bit. You might think you can see light at the end of the tunnel, but you need to resist the temptation to slacken your guard. You’ve already exhausted a lot of stamina, but you need a lot more to keep going. I see many businesses that have become fatigued with day-to-day crises and have lost all sense of direction and energy.

These are the businesses without a focus and without the clarity, control and planning that is needed to prosper in this new economic climate. It is worth asking yourself if you are doing the right things before it is too late. You deserve credit for getting so far, but you need to make sure that you can stay in the race.

John Dewhurst was financial director at Elmwood Design from 1994 to 2000. He is now an independent business turnaround specialist and runs www.vincimus.co.uk

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