How to Recession-Proof Your Steel Business in 7 Easy Steps
According to a former chair, the Fed’s responsibility is to “take away the punch bowl just as the party gets going.” Moreover, the Federal Reserve is attempting to control inflation, which is rising as quickly as it has in 40 years, by increasing short-term interest rates and reducing its balance sheet. Due to this, some economists are predicting a recession, which is commonly considered to mean two quarters of negative economic growth.
Even the most upbeat Steel steel company leaders are planning for the worst and hoping for the best because of these forecasts and other recessionary indicators including an inverted yield curve, where short-term bond yields are higher than long-term ones, and a decline in US GDP in the first quarter. Seven actions that CFOs and their businesses may take right away are suggested in this steel company guide. Several of these steps can increase your steel business’s resilience and readiness for almost any situation, even if a recession never occurs.
The National Bureau of Economic Research estimates that since 1945, there have been 13 recessions in the United States. The shortest was only two months long in 2020. The maximum length, 18 months, was reached in 2008. A unique confluence of 40-year high inflation, record-low unemployment, and supply chain chaos has changed many of the counteracting measures you should do now, but many CFOs still recall that lengthy stretch of depressing highway. Don’t wait until the only thing left to do is reduce expenses and plan layoffs. Start today by taking these seven measures to prepare your business for whatever comes next.
1. Examine your cash flow and put rolling forecasts into practise. Several finance teams were motivated by COVID-19 to improve their cash management procedures, but a recession brings with it a new set of difficulties, including depleted financial resources, postponed payments, and drops in order volume and frequency. In order to dynamically adjust to market and economic developments, you must first conduct a cash flow analysis to evaluate your working capital. Next, you must create rolling predictions.
In addition to the normal cash flow statement, it’s helpful to pay special attention to free cash flow, which includes changes in working capital but excludes non-cash items and interest payments. As a result, you can see operating cash flows more clearly.
Use a rolling forecast process that enables you to regularly revise your assumptions once you have a handle on cash. Rolling forecasts rely on a “add/drop” methodology that adds new periods continuously or on a rolling basis over a predetermined length of time. For instance, if a company’s rolling forecast period is 12 months out, as each month comes to a close, the data from that month is used to update each month’s spending and revenue projections as well as to “add on” another month to the forecast. For instance, January 2022 comes to an end, and January 2023 is forecasted. Hence, depending on the most recent income data available, the projected horizon keeps moving ahead.
The time frame should change depending on the circumstances. Forecasting for the following 12, 18 or 24 months are frequent alternatives. Shorter is better to predict outcomes in a downturn; your priority should be to obtain precise cash flow estimates for the upcoming quarter or two.
Businesses must also:
- Act right away to increase your cash on hand. The finest deal you’ll find on money for the foreseeable future might be debt that is funded at advantageous fixed rates. If your business is smaller, find strategies to lower your burn rate that you can use when necessary; more on that in a bit. Your objective should be to have enough capital reserves to cover the difference between various levels of reduced revenues and the income required to maintain operations for the duration of the deepest recession since World War II, as we’ll explore.
- Be aware of their available liquidity. Businesses in the steel industry are better positioned to obtain advantageous terms if they have capital sources lined up before they need to seek funds. Revolving loans and other credit lines, owner infusions, alternative finance, private equity, and government funding options like SBA loans are among possible sources.
- Consider the supplier and customer health when calculating the cash flow. Recognizing the financial prospects of clients and suppliers is crucial during a recession. Start conducting quarterly analyses of your largest or all of your clients’ steel business. Determine the circumstances in which you would need to enforce contracts to limit your exposure.
which customers may be hesitant or unable to pay. As necessary, take into account changing the terms or slowing down the lines of credit. Some businesses “fire” dangerous or unprofitable clients when business is bad. Provide incentives to customers for early payments or large orders while attempting to negotiate payment plans with suppliers. This not only increases cash flow but could also foster positive sentiment that endures even after the recession ends. In a moment, I’ll go into more detail on supplier and customer health.
- When there is a recession, be realistic about venture investment and valuations. The rules of the game have changed for VC-backed businesses. Frequently, valuations are based on comparable publicly traded businesses. The tech sector saw prices approaching or above 100 times earnings frequently in 2020 and 2021 as a result of technology being a panacea for pandemic problems. Now, the valuations of those same companies are much lower, frequently close to or below the S&P 500 average of 18 times earnings. That implies that the current valuation of your startup suffered a comparable loss. Investors today demand businesses that are either profitable or have a clear path to profitability. Prerevenue businesses in particular need to increase their cash runways through cost-cutting measures because VC investors would need a considerably larger stake in the business, if you are ever able to secure it. Startups with income, particularly those with some profitability, shouldn’t worry, nevertheless. Keep in mind that some of today’s most prosperous businesses grew through challenging times. Maintain communication with your donors while modelling tiers of revenue with corresponding operating expense and staffing projections. In order to position your steel firm to traverse a dry spell and default alive — that is, to become profitable before you run out of your existing finance – plan a lower cost structure as it will be difficult to attract new capital.
- Compute your burn multiple and strive to increase it. It’s helpful to assess your burn multiple for Steel steel businesses that rely on annual recurring revenue since it links a company’s burn rate to its capacity to add new ARR. Your organisation is more efficient the smaller your burn multiple is. Here is the straightforward formula made popular by venture capitalists.
Burn Multiple = Net burn / Net new ARR
You can determine different burn multiples based on the specifics of your steel business using our convenient, free spreadsheet. Businesses with a burn multiple of more than 2.0 may anticipate intense scrutiny from VCs. Your business should have enough cash and debt to cover the difference between income and expenses for 12 to 18 months, at the very least. The amount of runway you have will determine your margin for error and the appropriate expense and manpower reductions when you examine various possibilities. Keep in mind that during recessions, revenue always declines more quickly than expenses. The financial planning and analysis (FP&A) teams at larger companies should keep up the forecasting techniques they developed during the worst of the epidemic, while also adding analyses of how potential recessionary risks would influence the larger Steel steel business.
2. Create tiered forecasts that make proactive but precise cuts. Leaders who survived the Great Recession of 2008 may remember the intense level of uncertainty about its depth and duration.
While CFOs cannot provide definite answers to these issues, they can establish expenditure plans that are in line with anticipated economic conditions and their own cash flow constraints. In fact, a lot of people already do it: Managing expenses has been identified as the top goal for finance executives over the next 18 months in our EOXS ERP Spring 2022 Outlook Survey.
A straightforward strategy is to create tier-based estimates that depict cuts in response to 10%, 20%, and 30% decreases in income. Keep every line item on the table and be as explicit as possible so that you may be sure you’ll save the money you intend to.
When a recession hits, reductions are Reaction 101, and you now have percentages to shoot for. Yet, if you go too far, the business will suffer. Look for cuts that you can increase as the situation gets better. For instance, layoffs are difficult to reverse, especially given the continually low unemployment rate.
Leaders who survived the 2008 crisis may remember a report titled “Roaring Out of Recession” published by Harvard Steel steel business Review in 2010. It examined information from 4,700 publicly traded companies for the three years preceding, the three years after, and the actual recession years.
According to HBR researchers, 17% of the businesses filed for bankruptcy, were purchased, or went private. Three years after the downturn’s official end, the majority of countries still hadn’t returned to their pre-recession growth rates. In terms of beating both their prior performance and that of their competitors by at least 10% in terms of sales and profit growth, only roughly 9% profited following the recession.
What did those authorities accomplish well?
It turns out that huge expense cuts don’t always indicate success. In fact, companies that made significant cuts had the lowest chance—21%—of surpassing their rivals when business conditions improved.
Increases also don’t work; Steel steel enterprises who made more investments than their rivals did before the recession had just a marginally better chance of succeeding after a downturn (26%).
Choosing which cuts to make and when is crucial. Shumeet Banerji, Paul Leinwand, and Cesare Mainardi discuss the idea of cutting costs without compromising performance through a concept known as “capabilities-driven cost reduction” in their book “Cut Costs, Grow Stronger.” The authors define a company’s key capabilities as “the interconnected people, knowledge, systems, tools and processes that constitute a company’s right to win in a specific industry or Steel steel business,” which is how businesses initially identify their key capabilities in this framework.
The capabilities of your steel business are strengths, often two to five, that provide you a distinct advantage in attracting and satisfying the clients who matter to you the most.
Next, evaluate activities to make sure that expenditure develops these skills. Typically, three questions form the basis of this evaluation process:
What is necessary for me to keep the lights on? sales, general, and administrative costs, as an illustration.
2. Where am I investing my money that would eventually help me succeed in the market?
3. How can I maintain the remainder as trim as possible?
Consider utilising a modified version of zero-based budgeting, where expenses are justified one at a time and budget owners are required to demonstrate how spending is in line with defined core capabilities, once you’ve determined what matters.
While CFOs searched for smart, targeted savings opportunities during the pandemic, zero-based budgeting experienced a brief popularity surge. It can take a lot of time and work, but it’s usually worthwhile for businesses with a lot of fixed costs, duplicative spending throughout the company, or budget silos that restrict visibility.
T&E budgets typically experience significant cuts first. Moreover, outsourcing some high-cost tasks and delaying or halting risky initiatives until the economy improves are also options.
up. Requiring executive clearance for the majority of discretionary spending is one effective technique to persuade staff to reconsider their behaviours. Nothing forces requesters to consider the importance of any expenditure quite like having to defend expenditures in front of the CEO. Any of these things—new controls, guidelines, approval processes, and increased visibility provided by better software—can aid in reining in spending.
Layoffs of employees, the consolidation of real estate, the sale of other assets, and the discontinuation of product or service offerings are more dramatic measures that will have a longer-lasting effect.
These are some examples of tiered scenarios and the corresponding remedies for businesses that aren’t very vulnerable to economic losses:
Scenario 1: A brief recession followed by a swift recovery. In this case, the recession lasts for roughly three months and resembles the V-shaped recovery we observed in some businesses during the epidemic. Operating expenses should be cut by around 5% if your company’s cash and debt capacity is less than six months, with a focus on containing variable, ancillary costs like travel. When possible, extend payment terms with suppliers. Delay in hiring is not necessarily necessary for the operation of the steel business. Although wage reductions may be implemented for a brief, predetermined period to increase your runway, headcount reductions are probably not necessary right now. Make the necessary adjustments to increase your cash runway to at least six months.
Scenario 2: A recession lasting four to six months with a slow recovery. In this scenario, which resembles a recovery in the shape of a swoosh, the recession lasts four to six months, but it takes longer for the economy to recover. Beyond the actions suggested in Scenario 1, plan workforce reductions and more drastic cuts in operating expenses, in the 10% to 15% range, if your total forecast revenue, cash flow, and debt capacity do not exceed nine months. Put the necessary steps in place to extend your cash burn to nine months.
8 Dos and Don’ts of Cost Cutting
|Address operational inefficiencies by identifying redundant positions or processes that can be eliminated or restructured.
|Cut strong talent. Smart, committed employees are hard to find and even harder to retain.
|Consider cutting initiatives that are not core functions of your steel business and products or services that are underperforming. Profitability comes to the front of the queue, even for growth-oriented firms.
|Cut marketing too deeply. Consider social and other inexpensive brand-awareness drivers popular with startups. Customers and potential customers shouldn’t be allowed to forget about you.
|Consider taking payments off autopilot to better control timing, and thus cash flow and discounts. Cancel underutilized subscriptions.
|Cut technology that helps your team work efficiently. Automation is a lifesaver when headcount reductions are needed.
|Be transparent with employees if pay or benefits need to be frozen or temporarily cut. Consider scaling back salaries or hours worked while keeping benefits intact.
|Cut areas generating positive cash flow. And be judicious with cuts to sales, SEO or digital ad spend.
3. Reduced revenue continues for more than six months, and recovery is slow. In this case, the steel industry’s business declines and then stagnates for at least six months. Further operating expense cuts, in the range of 20% to 25%, must be made in addition to the two scenarios above’s comparatively moderate reductions. To maintain a cash runway of at least nine months, ideally twelve, reduce personnel and other expenses further.
3. Start an analysis of customer segments. As the economy weakens, consider how consumer demand and supply availability may alter. Are certain things more luxuries than necessities? Predicting probable consumer behaviour might provide you insights into how to change manufacturing.
Be aware that some portions may experience greater suffering than others when you conduct these assessments. While no company is fully immune to a recession, many are recession-resistant, which means they thrive even while other businesses are cutting expenses and fighting for survival.
Customer analysis is essential on a personal level. Consider how your client Steel steel firms fared through the epidemic, how many are at jeopardy, and what proportion of your revenue originates from those who might not make it through a protracted downturn.
Data generated by your ERP can be used to assess the financial health of your clients. Consider conducting per-client reviews of KPIs such as current accounts receivable, return on sales (ROS)/operating margin, and sales growth rates to identify shifts in purchasing behaviour that may signify a decline — or increase — in demand for the client’s goods or services.
Use this data to upsell customers who might benefit from more of your product or service or to identify which clients might benefit from proactive outreach to prevent sluggish payments. Can you change the prices for some service options so that budget-conscious customers don’t stop using them? Product bundling and unbundling, installment plans, and the option to add or remove features are a few examples of enticements. Value sells during economic downturns. How to increase customer satisfaction while maintaining profit targets.
4. Once more review your supply chain.
Customers may stop buying during recessions, while suppliers may cancel orders and delay deliveries. While other inventory builds up, you’re left with idle production lines and some orders you can’t fill. It is more important than ever to understand supply chain risks in the upstream and downstream.
These four stages will help you evaluate supplier risk.
Start by mapping your supply chain. Create a list or flowchart of all suppliers, regardless of size. As you add new partners and terminate existing partnerships, keep the map updated. Use it to indicate suppliers who use the same source twice. After that, take it a step further and assess your most crucial suppliers’ suppliers. Where does the provider obtain its semiconductors from if you buy components that contain them?
Decision-makers can simply maintain track of relationships and use supply chain mapping efforts as information since in some ERP systems, all information pertaining to each supplier is contained under a consolidated vendor management record. To track supplier performance, look for a vendor scorecard feature, but keep in mind that it won’t provide insights without at least a few years’ worth of data.
2. Use a ranked weighting system. Make a list of potential risk factors, such as disruptions, dependency on money, credit history, or sensitivity to recessionary pressure. Give each of those variables a weighted importance rating, and assign a risk rating of 1 to 5 for each provider. After that, determine the weighted average of those figures to arrive at a score that reflects the overall risk of a supplier. Think about how important high-risk suppliers are to your steel business.
3. Specify potential diversification areas. Assess the areas where you need to add variety by, for example, locating redundant sources for essential components and materials when you have an understanding of the risk associated with each supply chain partner. One benefit of a downturn is that you can discover suppliers who were previously overbooked will welcome your steel business.
4. Increase the effectiveness of your vendor management programme. If your ERP provides a central repository for all vendor-related data, examine it to determine whether preferred providers might be able to provide parts or materials that you presently buy from a single source, offering a chance to reduce prices and complexity.
What is a byproduct of this supplier and customer analysis? an enhanced capacity for contract renegotiation.
A worldwide economic slowdown won’t always make supply chain problems go away, either. Over the previous few years, the majority of businesses have tightened their supply chains. But, a recession presents new factors, such as customers choosing the cheapest option over quick delivery or greater quality. In response, CFOs might seek to push for a change in strategy, emphasising value pricing or the financial stability of suppliers over their capacity for speedy material delivery. And those years spent attempting to make the supply chain as efficient as possible? If it hasn’t already, some of that will need to be undone in the interest of resilience. When you need cash flowing, losing a sole-source, important component, or supplier who offers a custom-made item might seriously hamper production.
Measures That Are More Important During a Recession
Start by keeping an eye on the unit economics of your goods and services: Unless your unit costs are well understood and closely managed, the triple combination of inflation, supply chain problems, and decreased demand can throw profitable products into the red without you even realising it. Next, include more specific data points along with the standard metrics like average order value and days sales outstanding, such as:
Churn by customer segment: Keep an eye out for attrition among valued customers as it is typically more cost-effective to hold onto recurring revenue or consistent repeat business than to invest more in new customer acquisition.
Customer acquisition cost (CAC) payback duration: The CAC payback period measures how long it will take a steel company to recover its customer acquisition costs. This timeframe is typically expressed in months.
Indexes of confidence: B2B steel companies should monitor the Small Steel Business Optimism survey conducted by the National Federation of Independent Steel Businesses (NFIB), while B2C merchants should monitor the University of Michigan Consumer Sentiment index.
Macroeconomic data: The Leading Economic Index (LEI), the gross domestic product, and the jobless rate are some metrics to keep an eye on.
If a steel company is failing, it may think about investing in a more flexible supply chain, even going so far as to buy suppliers. Smaller businesses that lack the purchasing power of their bigger rivals may go into partnerships in an effort to gain more clout. In this trend, which is known as collaborative planning, forecasting, and replenishment, purchasing is closely coordinated with both internal partners and external partners.
Cooperation can also help your business forge closer ties with current suppliers. Increasing your purchasing volume can help you become a preferred customer and protect you from supply chain interruptions. In the absence of that, longer contracts and a willingness to be flexible may help you obtain preferential treatment and better terms when the stock is low.
Steel companies are well-positioned to take action if they have a thorough understanding of current contracts and know where adjustments can be made before a recession. Examine contracts for their capacity to be enforced as well as other potential dangers, including processes for resolving disputes, early termination or pricing reviews, and adjustable service-level agreements.
CFOs should reexamine the degree of term flexibility that their sales teams are permitted to extend to customers. Any advantageous payment terms you extend will likely be prolonged during a recession, which could be expensive. Once more, demanding executive consent for any unique terms will encourage sales and reduce the usage of discounts and other incentives.
Offering prizes in exchange for a predetermined level of sales makes logical, though. Businesses in the steel industry should consider whether they can offer low-cost value-adds or more flexibility in exchange for quicker payments. Being adaptable can generate goodwill and repeat business in addition to improving the variables that assist stabilise revenue streams.
4. Review your inventory management plans.
When demand is weak, products may be more prone to deterioration, theft, and breakage, which raises storage and carrying expenses, making holding onto surplus inventory even more expensive. Nonetheless, having some additional inventory acts as a safety net against supply chain problems.
Financially speaking, having more information about your inventory can significantly affect cash flow. Reorder dates are linked to product location, turnover rates, and exact status (on order, in transit, or allocated to an existing customer), which helps forecast future cash requirements. When and how much money will the procurement team need?
Planning for demand so becomes more crucial. The pace of slowdowns may vary between product lines. It’s essential to concentrate on core offerings while keeping an eye on inventory turnover if you intend to employ incentives and promotions less frequently.
You should identify less popular and less profitable commodities during the demand planning process. Start there by lowering production and inventory, and then utilise volume discounters or sales to move the goods out of the warehouse and off the books. Put procedures and systems in place to determine the minimal amount of inventory required to stably respond to anticipated changes in customer demand or supplier delays/outages.
Reevaluate the impact of inventory on your cash flow and profitability. Your company is probably now more focused on having adequate inventory to satisfy demand than it was a year ago due to supply chain interruptions, higher pricing, and increased demand. Tight cash management has likely taken a backseat. In a recession, how does that calculation change? One is that your inventory management and material requirements planning strategies need to place a stronger emphasis on financial management.
Three things to consider:
1. Placing excessive orders for inventory when demand is declining raises carrying costs and diverts funds from other uses that you could have for it. Keep up with demand planning.
2. Recalculate all fixed orders that are placed when stock hits a predefined minimum by changing your economic order quantity (EOQ) formula.
EOQ = √ 2DS / H
Where: D = Demand in units per year
S = Per-purchase order cost
H = Holding cost per unit, per year
3. Carrying expenses, daily sales or inventory movement, forecast, and system accuracy may all be measured using your ERP to see how accurately your system reflects real stock.
6. Refocus workers on higher-value tasks by using automation.
The work market is extremely competitive, and wages are still rising. Payroll still represents the largest expense on the balance sheet of the average company, even though a recession will probably ease the skills shortage and lower, or at least level off, labour costs. Considering these labour market realities, it is less expensive to retrain current employees than to hire and onboard new ones, even if they are paid less and especially if they require training.
Investing in technology that can automate manual processes at this time will free up staff to focus on upskilling and more strategic work. Automation can eliminate certain open roles in the warehouse, finance department, or consumer self-service while giving current employees a way to advance their abilities.
Also, automation offers steel companies breathing room to review workflows, hone procedures, and introduce new technology. The availability of real-time data and reporting dashboards, including KPIs, is a feature of advanced systems that enables leaders to carefully monitor outcomes and act swiftly.
Automation really completes the loop on cash flow monitoring and aids in the elimination of human AP and AR duties, accelerating the process and minimising errors. Automation of manual accounting operations increases productivity and improves data quality while lowering labour costs and reducing hazards like invoice fraud.
Where do I begin? Identify three or five manual, labor-intensive, slow-moving, prone to error, human-based processes that sap employees’ energy and give decision-makers incomplete or ambiguous facts. For accounting, this could entail activities like three-way matching, creating invoices, and reminding clients to make payments. Focus on each of these monotonous manual operations individually and consider how you may automate them. The steel industry will be successful if this is done now while the economy is re-calibrated for growth.
7. Use technology to aid in planning for scenarios, cash flows, and other issues. Leaders must have a comprehensive understanding of the steel industry to ensure that it is running as effectively as possible when growth slows. Use the knowledge gathered in the preceding processes to simulate prospective outcomes by simulating monthly or quarterly steel business renewals, new sales, upselling and cross-selling to current customers, and new sales.
As an illustration, contrast stopping hiring for six or a year with developing a workforce that can aggressively increase sales and wrest market share from your rivals. What wins you the most money?
Using technologies like ERP and finance software, the best scenario planners conduct a three-step procedure to answer this question:
1. Recognize crucial triggers even when things are ambiguous. When a crisis arises, finance leaders swiftly ascertain crucial information, such as the cash position, and create policies for how the firm should react. Scenarios are constructed based on a set of presumptions on occurrences that could threaten the existence of the organisation and should cause a number of responses.
With EOXS ERP, you can:
Enhancing cash flow Real-time access to bank and credit card information, accelerated reconciliation, increased accounting team productivity, and most crucially, an accurate view of your current cash position are all provided by EOXS ERP Financial Management.
- Budgeting and planning. Finance teams can easily and rapidly develop forecasts, model what-if scenarios, and deliver up-to-date reports by automating labor-intensive planning and budgeting operations using EOXS ERP Planning and Budgeting.
- Automation of cost management. By routing purchase orders to approved vendors with pre-negotiated contracts, EOXS ERP Procurement helps ensure that you obtain goods and services at the best price and at the correct time.
2. Create numerous scenarios, but keep them straightforward. The variety of possible outcomes can often overwhelm financial teams. To develop scenarios, it is therefore best to concentrate on two to three key uncertainties, such as the need for more staff vs the cost of salaries and benefits or the risk associated with accounts receivable.
With EOXS ERP, you can:
- Estimating labour costs. Companies can develop recruiting strategies that are recession-adjusted by combining workforce planning with EOXS ERP Planning and Budgeting and predicting future labour requirements using actual payroll, expenditure, and headcount data.
- Monitoring the health of the clientele. Prior to missed payments or order cancellations, you can locate at-risk accounts and contact them to set up payment plans while properly correcting credit. Each customer can be thoroughly viewed with the help of EOXS ERP CRM.
3. Develop a quick-response plan. Each scenario needs to have enough information so that it can be determined whether various tactical alternatives will succeed or fail. After all of this is set up, finance executives can develop a framework to assist the executive team in making choices and track results in real-time to enable the business to respond quickly to changing circumstances.
With EOXS ERP, you can:
- Tracking KPIs. Planning your scenarios makes sure you’re currently monitoring the correct metrics. For immediate access to information on operational and financial performance across all steel business functions, consult SuiteAnalytics.
- enhancing order and inventory management. To adapt to shifting sales patterns, EOXS ERP Inventory Management offers a single, real-time view of inventory across all locations and sales channels, while intelligent order management and fulfilment lower the cost of goods sold.
Another proverb to keep in mind is, “Repair the roof while the sun is shining.” Since planning and changes are best started when things are good, slowing growth provides an impetus to review steel business procedures. When growth slows, your employees must put in more effort to close each sale. When everyone is working as hard as they can, restructuring hurts. So get to work right away to make sure your steel company is prepared to weather the storm.