Bracing for More Tough Times

Third-quarter earnings have, not surprisingly, been dismal so far and the outlook for Q4 is similarly bleak. The economy's recent turn for the worse leaves companies in virtually every industry scrambling for means to weather the storm.

The Wall Street Journal reports that Circuit City Inc. may close at least 150 stores and cut thousands of jobs to stave off bankruptcy, and Caterpillar Inc.'s third-quarter net income fell 6.4 percent as a result of high commodity costs that have impacted sales; Yahoo will terminate at least 1,500 workers or 10 percent of its workforce after reporting disappointing third-quarter profits, according to The Associated Press.

Slowing growth, weakening demand, and reduced lending by banks compound an already difficult environment in which key commodity prices are rising rapidly, according to a Grant Thornton report so the firm is advising clients to take proactive steps now to prepare for potentially tougher days ahead.

Most of the firm's advice is based on sound business practices, which sounds simplistic, but management often forgets the importance of fundamentals when the focus has been on revenue growth as it has at most companies in recent years when credit was easy and global demand was escalating. Getting back to basics is the order of the day.

Fundamental number one revolves around cash flow. If earnings are growing faster than cash flows, red flags are raised, says the report. "Stress-test your business plan and understand the resulting impact on liquidity. Focus on the components of working capital and the cash conversion cycle and build and conserve cash," suggest Ben Gonzalez, a principal in the Grant Thornton LLP Advisory Services practice, adding that companies should negotiate aggressive credit terms with suppliers and customers.

The second fundamental rule is to be relentless on cost control. "Employ zero-based budgeting to review all costs very carefully in terms of their value to the business. What costs do you actually need to run the business? Conduct relative risk and benchmarking analyses against competitors in the industry, and look for ways to improve performance. Reduce spending as much as possible, and hold managers accountable for all expenditures and cash outflows. Institute cost justification and baseline investment returns on new projects."

The rest of the report's survival rules are equally tough medicine -- but ignoring basic business truths is a prescription for more debilitating pain.