Tuesday, January 6, 2009

Recession and the Micro Multinational

Good Bye 2008.  What a year it was. Every single business move that we made since starting Heaven Fresh in 2003 was put to test in 2008.  With no prior experience of managing a business in an economic downturn,  recession was just an abstract in my mind until recently.  I remember thinking to myself in early 2008 that we must be really good that the so called recession hasn't made any difference to the Heaven Fresh sales.  Then we entered the summer season of 2008 with an expectation of usual low sales volume.  Somehow I managed to comfort myself that as always we would break even in the summer months and would recover from the slow season in September. When I got back from the Middle East office by the end of August, I found out that  our credit cards and credit lines were all maxed out trying to keep up with salaries and operational expenses.

All of a sudden it hit me that perhaps recession was not some made up story by the news channels and business magazines. It was real and needed to be dealt with. By using my old fashioned calculator and the latest snapshot of our P&L reports, it did not take me long to discover that even if we achieved our "normal" sales level in last four months of 2008, we would not be able to get out of the operational debt accumulated over the summer months.  By the end of September 08, it was painfully obvious that our "high season" was not going to be as high and we had to do something about it.  Right around that time, my dear trader friend, Celal Okur, forwarded me this presentation by Sequoia Capital.

Out of this lengthy presentation, the following three slides got imprinted in my mind. We had to save our young company from getting into the "Death Spiral" of the 2008 recession.

   death_spiral

survival

solution

Well, we took the solutions presented by Sequoia to heart and made some instantaneous moves based on the suggested solution. Some of them were:

  • Cut the management bonus installments
  • Cut the base salaries of the sales staff
  • Eliminated the marketing expenses that did not produce immediate results
  • Stopped the R&D project and laid off the staff
  • Moved the UK office from London to Birmingham to save on rent (a massive saving for operation our size)
  • Held back the payable invoices, where ever we could
  • Diverted resources to high margin online cash sales
  • Expanded the offshore staff to reduce payroll expenses

As a result of the above steps, we managed to turn cash-flow positive in November and December 08.  As of today (January 06, 09), uncertainty is not over yet. The recession fears still loom and economy is still sliding.  However,  I feel more confident that we are going to get through this rough economic patch. We have also devised a plan to expand sales without increasing overheads. 

As the survival instincts kicked in due to the deteriorating business conditions, our operation in multiple countries and our small size gave us the flexibility to shift resources back and forth very quickly on as needed basis. Thus being micro-multinational became a saving grace. Once the economic chaos is over, this recession might turn out to be the biggest lesson for me on how to steer the ship in choppy waters.

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