The Bad Year

Revenue falls by a third. The cause is external and nobody made a mistake — a market turned, a season failed, a customer was lost for reasons unrelated to performance.

What happens next was largely determined before the year began.

Capacity is built in the good years

The decisions that determine whether a firm survives a bad year are made when nothing is wrong, which is precisely when they feel unnecessary.

Reserves held rather than distributed. Fixed commitments kept lower than the firm could support. Debt structured so that a poor year does not breach anything. Customer concentration addressed. A workforce that is not so lean that any reduction cuts capability.

Each of those costs something visible in a good year and returns nothing until the bad one. Which is why they are so frequently deferred, and why the deferral is invisible until it matters.

An owner who wants to know how a bad year will go should look at what has been done in the last three good ones.

Establish the position quickly and precisely

The first task is arithmetic and it is frequently avoided for weeks because the answer is unwelcome.

How many months of operation can the firm fund at current cost? What is genuinely fixed and what is not? What are the actual dates — payroll, debt service, tax, insurance — and where is the first point at which something cannot be met?

Weekly cash rather than monthly accounts. A firm under pressure that is still reviewing its position monthly is operating on information that is three weeks old at the moment it matters most.

That number — the date at which something breaks — is what every subsequent decision is measured against, and an owner who does not know it is making choices in the dark.

Talk to the bank before you have to

The disclosure principle from the crisis chapter applies with unusual force here, and owners get it wrong in a predictable direction.

A lender told early, while the firm still has options and is presenting a plan, has instruments available: a restructured schedule, a temporary accommodation, a covenant waiver. Told late, or discovering it themselves, they have far fewer and are dealing with somebody whose account they no longer fully trust.

The instinct is to wait until the picture is clearer, which is the same instinct that produces every other late disclosure in this Library, and the same three clocks are running.

What to say and when involves the specific terms of your facilities and belongs in a conversation with your accountant and attorney before the one with the lender.

Cut once

The arithmetic from the turnaround chapter, and it holds here.

A reduction that proves insufficient produces a second, and after two rounds everybody understands there will be a third. The people with options begin looking, which means the second round removes people you chose and, over the following months, people you did not.

So the correct depth is what the analysis says plus a margin for the analysis being wrong, taken in one action, with an honest statement of whether it is finished — and that statement should only be made if it is true.

The slow bleed feels kinder and produces a permanent state of anticipated loss in which nobody starts anything and the strongest performers leave first.

What to protect while cutting

Four things are highly cuttable and load-bearing, and they go first in most reductions because their value is not currently visible.

The people who would run the recovery, frequently mid-level and expensive relative to their apparent output. Maintenance on anything that fails expensively. The thing customers actually value, which is often labour-intensive and therefore prominent on any cost analysis. And whatever remains of the firm’s capacity to pursue new work, which is the only route out.

A firm that cuts its way to break-even and has removed its ability to win anything has bought a year.

What the workforce needs

Not reassurance, which will prove false and will be remembered.

An honest account of the position, an explanation of what is being done, and the truth about whether more is coming. People adjust to a difficult picture. They cannot adjust to a picture they were not given, and an owner who says things are fine and then announces reductions has spent something they will need for the rest of their tenure.

In a small community this matters more, because the account of how the firm behaved circulates and becomes the community’s assessment of it. The obligations from the employer entry apply in full and they apply to the execution rather than to the decision.

Judgment degrades and nobody will mention it

A bad year is a long crisis, and the pattern from that entry applies exactly.

Under sustained pressure the time horizon shortens, new information is processed as burden rather than evidence, the circle of consultation narrows to people who agree, and commitment hardens. The subjective experience is clarity rather than doubt, which is why it cannot be detected from inside.

An owner-operator has no board to notice, and employees will not raise it.

The protection is somebody outside — a peer, an advisor, a retired operator — asked in advance to say when your decisions are getting shorter-term or your consultation is closing. That request has to be made explicitly, in an ordinary month, because it will not be volunteered in a difficult one.

The decisions to defer

A bad year produces pressure to settle things that have nothing to do with it, because the firm is already in a decisive posture and everything looks like it needs resolving.

Selling the business. Restructuring ownership. Signing a long contract on unfavourable terms because negotiating properly requires attention nobody has. Letting somebody go for reasons that would not survive examination in an ordinary month.

The rule worth stating at the outset: nothing irreversible that is not about the immediate situation gets decided during it. Keep the list of deferred items, so the deferral is deliberate rather than accidental, and take them up when the position has stabilised.