Decision Making is Trying Times

Mar 23, 2020 by Roger Scherping

Most companies are facing trying times right now. Revenues have dropped suddenly and dramatically, and they certainly will stay at reduced levels for at least a short time, but maybe for longer. Companies are having to make decisions about cutting staff, reducing inventory, and reducing expenses. For most companies, these decisions are difficult to make because it’s not often we suddenly find ourselves in these very difficult situations – think 9/11 or the Great Recession. Most of us just aren’t prepared to make these kinds of decisions because they happen so rarely.

People are asking questions like: Is it better to reduce my staff now in order to save cash? But that will weaken my team, and we won’t bounce back as fast after this is over, so maybe I wait? How will my decisions change if revenue only drops by 10% for a few weeks instead of dropping by 50% or for a longer period of time? How can I reduce my fixed costs to mitigate some of the personnel changes that I end up making? How low will my cash get? Should I be looking now for a loan?

What makes this type of decision making especially difficult is that most companies don’t have any way to make a rational, carefully thought out decision. What they need to do is study different scenarios. The scenarios should include, for example, what happens with a 10% decline in revenue, a 20% decline, and a 50% decline over different time periods. They need to understand the financial impact of those different revenue declines. Then they need to understand what their options are. They need to consider different strategies like reducing staff or fixed costs or inventory. And they need to see the projected financial impact on cash and profits for each scenario and each set of strategies.

Bottom line, they need to quantitatively figure out the best way to get through this crisis, rather than making rash, seat-of-the-pants decisions.
                                                                                                                                             
That’s exactly what I did with a client of mine. We use ProjectionSmart Growth every month to look ahead and see what their financial future looks like. Where before we were concerned with how they were going to handle their fast growth, now we had to figure out the best way to deal with a sudden contraction. So we developed three scenarios: no revenue change, a 20% revenue decline for 6 months, and a 50% revenue decline for 6 months. Then we modeled them in Growth.

Growth allows you to model three different scenarios, so we assumed a different revenue decline in each scenario. Then we played what-if. We tried different staffing changes and different fixed cost reductions. We figured out how we could best deal with each scenario. Growth showed us the financial results of each scenario and the impact that our business changes would have on their financial results, both on profits and cash.

In the end, my client found that things probably weren’t going to be as bad as they feared. With Growth they could clearly see the financial impact of each scenario and understood what changes they needed to make to survive. They could see that some of the scenarios showed them losing money and having negative cash flow for a while, but by quantifying the impact of their decisions, they gained confidence in the decisions they had to make. Growth helped them see a path to success.

I’m reminded of one of my favorite quotes:  “Decision making isn’t difficult. Decision making is easy. It’s getting the necessary information that is difficult. How difficult would it be to pick the right stock if I gave you a copy of the Wall Street Journal for one year from today?”

ProjectionSmart helps you get the necessary information to make decision making easier. Nothing could be more reassuring in these trying times.

Try out Growth for free, and email me if you have any comments. I’d love to hear from you.


 

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