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How building a resiliency strategy can help your business weather periods of economic hardship

How building a resiliency strategy can help your business weather periods of economic hardship

Synopsis
4 Minute Read

A resiliency plan is essential to help your business remain competitive as growth stagnates across all industries and interest rates continue to rise. Get started on your plan by evaluating your business and asking yourself how you can:

  • Increase your return on capital
  • Reduce your working capital
  • Communicate with your suppliers and customers
  • Invest in disruption

Each of these factors will help your business maintain its value and remain resilient through periods of economic uncertainty and unprecedented success.

Senior Manager, Consulting - Performance Improvement & Operational Excellence

Your business may have grown significantly in the past few years and scaled its revenue and operations accordingly — but has your profitability increased proportionally?

You may have taken on more debt to expand your business in the previous low interest rate environment. But interest rates are rising — increasing the cost of your debt servicing. Now you may be wondering how your business can retain its profitability and sustain growth as rampant inflation chips away at your bottom line.

Consider a hypothetical healthy company’s profitability, which may have been 10 percent just a few years ago. The same company might now make less than five percent earnings before interest, taxes, depreciation, and amortization (EBITDA) due to the four-percent increase in interest rates, rising costs, and other growth challenges.

The cost of capital has more than doubled and profitability has halved — reducing return of capital ratio to less than one fourth of what it was previously. How will you attract capital investment and remain resilient in this current environment?

It’s one of your key responsibilities as a leader to make the right choices to ensure your business remains resilient in every economic condition. Here we look at several actionable tips to help make your business more resilient and to ensure it not only survives these economic headwinds — but thrives.

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Increase the resiliency of your business model

Increasing your return on capital and reducing your working capital play essential roles in making your business more resilient. Not only will it ensure you have the capital available to react quickly to changes in a volatile marketplace, but it will also enable you to compensate your shareholders for the risk they have taken and attract potential new investors.

To begin making your business more resilient, consider where you can:

Increase return on capital

The first step towards ensuring your business is resilient in growth is to prioritize capital resilience. Capital resilience enables your business to withstand unexpected shifts in the marketplace and can help ensure the long-term sustainability of your organization.

Start by evaluating your return on capital — or the amount of profit your company earns relative to the amount of capital your shareholders invest. For a business to thrive, it is essential that your return on capital exceeds the minimum hurdle rate, or the minimum amount of profit to justify the risk shareholders have taken to stay invested in the business and for the company to attract potential new investors. The minimum hurdle rate varies based on the risk ratio assigned to your industry — and your capital productivity is higher the greater your return is above the minimum hurdle rate.

To increase the productivity of your capital, it is important to segmentize the returns generated by each area of your business to identify assets or areas that may be under or overperforming. Then create a strategy to maximize your capital — for example, improve the cost structure, grow revenues, and/or even consider reducing your capital exposure by redeploying, recalling, or divesting certain segments of your business that cannot generate the desired returns.

For example, imagine a logistics company that recalls 25 percent of its lowest performing trucks. It may seem counterintuitive to reduce capital, but the company is improving its return on capital by reducing its maintenance costs, manpower, and depreciation — all key drivers to growing profits.

The logistics company then sells its low performing trucks and deploys the remaining, trucks to its most profitable routes. While it makes the same profit as before, the company has increased its capital returns by using fewer assets to generate the same amount of profit.

Examine your business to determine if you can deploy fewer high-performing assets to its most profitable areas or customers. There may be some underperforming assets you can’t deploy for better gains. Selling these assets will enable you to reduce your capital and pay back your shareholders. Alternatively, you can reinvest the money into areas that are overperforming or pay down your debt to help your business remain resilient in a high interest rate environment.

Reduce your working capital or increase your cash conversion

You may also consider reducing your working capital, or the amount of capital you need to fund a cycle of operations in your business. Many companies are dependent on debt to pay for their operating expenses — but as interest rates rise you need to prioritize cash management to reduce debt and increase your surplus cash flow at the end of a cash cycle.

Begin by reviewing your accounts receivable (AR) and accounts payable (AP) cycles to identify when cash enters and leaves your business. Explore possible changes to increase your cash flow needs by negotiating with your suppliers for higher credit facility or payment terms. Concurrently, you may also prioritize or incentivize customers who are willing to pay early — perhaps by offering fixed contracts.

Materials that remain in your inventory for extended periods of time before you sell are another common use of capital. Explore how you can optimize your inventory by completing an ABC analysis to reduce your level C items — or those with low returns and longer return cycles versus the profitability of these items. Changes at these levels will enhance your cash flow and enable you to pay back your shareholders or pay down your debt to reduce exposure in your business and make it more resilient.

Prepare to face new risks

The challenges you face will be as unique as the strategy you employ to increase the resiliency of your business. Whichever path you choose to take, remember your strategy must consider:

Prioritizing employee engagement

You may lose some customers and sales as you prioritize the most profitable areas of your business. However, changes to your business’ operating model may also cause employees to feel uneasy — at times accelerating the pace of attrition — especially if they feel unduly impacted or uncertain of how their role has changed.

Communicate with your employees about the challenges your business is facing and set key objectives to make sure everyone is working toward the same goals. A shared sense of responsibility will reduce employee departures, improve employee engagement, and create a cohesive environment where everybody is working together to make your business more resilient.

Investing in disruption

You may experience unexpected challenges as you work towards making your business more resilient. Your customers may be unable to absorb costs or buying habits may change, forcing you to reconsider how you approach your business, the market, and how you operate.

Adapting to current challenges and anticipating new and emerging risks can help you remain profitable and competitive in an ever-changing business environment. Imagine your market two to three years in the future to make sure you pursue the right investments in products, technology, and/or diversification to consolidate your position in the industry.

For example, acquisitions can play a key role in increasing the value of your company. Focus on companies that are developing innovative new products that may increase in demand. You may also consider increasing research and development investments in areas that will help maintain your profitability and adapt to unexpected shifts in the market.

Communicating with your suppliers and customers

Ensure ongoing engagement with your suppliers and customers to communicate any challenges your business may be facing in the marketplace. For example, you may not be able to fully absorb an increase in pricing — however, your supplier may agree to help manage or absorb the cost equally to retain your organization as a customer. Alternatively, you may consider buying materials in smaller but more frequent volumes to optimize working capital.

Open communication with your customers can also be beneficial for your business. Customers may be able to forecast an increase in the demand for the products they sell — and may be willing to renegotiate the adoption of new material costs accordingly.

An open line of communication with both your customers and suppliers will increase the resiliency of your business by allowing it to respond quickly to risks and adapt to changing marketplace conditions.

Driving profitability

Increasing the profitability of your business will also help it weather periods of economic uncertainty. Training programs to increase productivity, negotiating better prices, and reducing wasteful expenditures are a good place to begin improving your profitability.

However, profitability is a complex subject that requires a deeper look — and we’ll review specific strategies to maintain and grow profitability in our next article.

Take the next steps towards resiliency

It is essential to create a strategy to increase the resiliency of your capital and reduce the impact of high interest rates of your business. Review your business to determine where you can improve your returns and manage risks to help your organization remain resilient in an ever-changing business landscape.

Contact us

To learn more, contact: 

Yohaan Thommy, PMP, LSSBB, CMC, Partner
[email protected] 
905.247.3254 

Nakul Gupta, Senior Manager, Consulting - Performance Improvement & Operational Excellence
[email protected]
416.596.1711 

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