News & Case Studies
It’s time to recession plan. It’s coming and it’s coming fast and forewarned is forearmed. We are sharing some key preparation strategies to get ready… before looking at furloughs or layoffs.
Economic downturn means taking a look at both sides of the P&L with a specific focus on cash flow. We look at both revenue and expenses to see what we can do to change behaviors to increase the money coming into the business and reduce the money flowing out.
We generally recommend that you look at these options sequentially if you can. The level of organizational disruption increases with each one, and while the goal of the exercise is to avoid layoffs, your people will start to smell smoke and where there’s smoke, there’s fire.
1. Look at opportunities to increase or accelerate cash flow.
This sounds obvious, but from a people strategy and behaviors perspective, we look for ways to change processes to influence how businesses are paid – how much and how fast. Consider how and when you send out invoices, opportunities to change payment terms, and how you engage with customers to build a relationship at the beginning so that you don’t have a difficult time chasing receivables later.
Be as transparent as you can with your people. Recognize (and reward if feasible) those who go the extra mile to follow up on receivables or who help bring in additional business.
2. Find new ways to increase labor utilization rates.
One of the first indicators of a lagging economy is a dip in labor utilization or productivity rates. In some organizations this is measured and you’ll have metrics to point to. In others, you will start to see people with generally more idle time around the office. Either way, if the work isn’t coming through as quickly as it was, it pays to have a list of internal projects or activities that may generate future revenue. Alternatively, asking people to look at ways to improve internal processes, develop new ways of working, or other internal projects that you typically don’t have time to tackle when business is booming. Invest the time now and reap the efficiency rewards later.
3. Ask people to take, or not take, vacation time
If you’ve hit a slump in business and currently offer vacation time, you can ask that employees take that paid time during periods where business is slow. Paid vacation is a company offered benefit; it is not required by law, and the employer can impose restrictions in terms of how and when it is used. If business has slowed to the point where you don’t have a consistent work load, you can ask them to take some time off and give you a little breathing room to bring new work into the business. Please note that there may be state laws that limit this and this does not apply to protected sick leave.
If things get really slow, then the opposite holds true. You may want to restrict vacation time in an attempt to drive an increase in labor utilization. If you do this, make sure you have a work for them to do. If you have exempt employees, they are entitled to their salary if they do any work at all during the week.
4. Cut employee hours
If you are unable to sustain current production schedules, the next step is to cut employee work time. This can mean changing employees from full to part-time or reducing schedules for existing part-time resources. If you have non-exempt employees, you can simply reduce their work schedule. If you have salaried, exempt employees, then you will need to reclassify them as non-exempt hourly employees before you can cut their hours and pay. Please do not do this without consulting with your employment practices attorney or contacting us. It is critical that your decisions here are guided by specialists.
Cutting hours is the first observable sign of trouble among your workforce, so people may start looking for other opportunities as they see their paycheck decrease. You can mitigate this risk with careful and planned communications to address why, how and how long the change will be in place, but you may see a spike in employee departures. If things are really bad, cutting employee hours may be what you need to reduce your overall payroll costs, so hang tight. If you have key resources you want to retain, make sure they know how much you value them and their contribution to the business. If you have 3rd party resources in the form of temporary workers or consultants, make all efforts to reduce these costs before you cut hours for your permanent employees.
5. Voluntary unpaid leave
If you’ve run out of other options and don’t want to head down the path of furloughs or layoffs, your last option, is to ask employees to volunteer to take unpaid leave for a period of time. If you currently offer healthcare benefits, maintain employer contributions, and be clear and up front about the length of time you are offering to cover a temporary downturn. This strategy can be effective when you expect things to pick up in the short to mid term and you don’t want to lose great people, and the investment that you’ve made in developing and training them, to someone else. Again, careful communication is critical here, so working with someone to craft a communication plan and schedule is key in avoiding both managers and employees misunderstanding what you are trying to achieve with your strategy.
In light of recent changes related to COVID-19, voluntary unpaid leave is less likely to be a realistic solution. Please contact your attorney or other specialist to discuss options. Please consider your alternatives carefully before proceeding.
Red Clover specializes in designing and implementing strategies to address market-driven change. If you feel that you need help retaining talent during an economic downturn but are unsure of how to do it and effectively cut costs, please reach out to us. We are passionate about helping clients do things right and do the right thing, especially in challenging times.
Written by: Jen L’Estrange
Learn more about Jen on LinkedIn.