Operational resilience

In the dynamic business landscape we find ourselves today, it is more critical than ever for companies to prioritise resilience. In this second instalment of our series on building resilience in uncertain times, we delve into the need to develop operational resilience in order to support businesses navigate through challenging situations.

What can companies do to react to the current adverse operating conditions that we see locally and across the world?

1. Inflationary pressures: Stay informed about the sources of inflation and how they may impact your business. Having a clear understanding of these pressures will help you adapt and make informed decisions.
2. Customer sentiment: Stay connected with your customers and gauge their sentiment. Pay attention to their changing needs and preferences, and be proactive in adjusting your strategies accordingly.
3. Reliance on significant contracts: Identify any significant contracts that your business heavily relies upon. Evaluate their stability and explore ways to mitigate potential risks associated with them.
4. Supply chain pressures: Keep a close eye on your supply chain and take proactive measures to address any critical vulnerabilities. Diversify suppliers if needed and build redundancy where possible.

1. Rapidly increasing input costs: Monitor the costs of raw materials and inputs within your industry. Rapid increases in these costs can impact profitability and sustainability.
2. Declining revenues per employee: If revenues per employee are declining without any adjustments to the overall cost structure, it could indicate an issue that needs immediate attention.
3. Eroding or negative margins: Falling margins can signal underlying problems in the business. Investigate the causes promptly and take necessary corrective actions.
4. Cash flow issues: Be vigilant about cash flow management. Inability to explain cash shortfalls or frequent requests for credit line increases are potential indicators of financial strain.

In uncertain times, adopting a hands-on approach to cash management is crucial. Here are some key strategies:

1. Establish a cash conscious culture: Ensure that every member of your organisation incorporates cash considerations into their decision-making processes. Make cash management a shared responsibility - in some cases we have even seen companies implement ‘Cash Management Offices’ to better allocate responsibility and accountability, while providing increased visibility on cash flows through the organisation.

2. Determine value-creating elements: Regularly extract and monitor information from your systems regarding revenue, cost and working capital. Analyse which products, customers, and channels generate or destroy value.

3. Implement robust cash flow forecasting and leverage data: Develop short-term and medium-term cash flow forecasts to gain clarity on your financial position. Consider multiple scenarios incorporating external data and predictive analytics, for better forecasting accuracy. 

1. Addressable spend optimisation: Identify areas of spending that can be reduced without affecting crucial operations. Avoid cutting headcount if possible and focus on eliminating unnecessary complexity and duplication.

2. Supplier and inventory management: Review and optimise third-party spend, ensuring compliance with supplier terms and extending payment terms where feasible. Unlock cash trapped in inventory by shifting from just-in-case to just-in-time practices.

3. Customer cash optimisation: Implement a rigorous process to monitor and collect receivables efficiently. Maintain open communication with customers to address any payment delays.

4. Continuous improvement initiatives: Establish a programme office to drive operational improvements and maintain agility. Invest in initiatives that align with your business objectives and ensure ongoing efficiency.

   Consider the example of a privately-owned storage business facing revenue pressures, which we were asked to support. By leveraging data insights and executing targeted initiatives, it was able to support operating improvements, access new revenue streams, and reallocate capacity. As a result, the company thrived even during the peak of the COVID-19 pandemic.

As businesses navigate uncertain times, prioritising operational resilience becomes paramount. By reacting to current dynamics, spotting triggers and warning signs, managing cash and working capital effectively, and leveraging the power of data, businesses can preserve value through the downturn and grow from a stronger base.

The final blog in our series of building resilience in uncertain times will be written by Andrew King, a director in our Capital Advisory and Restructuring Services team. It will focus on the importance of building balance sheet resilience.