Managing Capital Shortage in a Small Courseware Company

Introduction

Post Thinkers and Creators has lost two of its five largest customers and has seen significant business contraction as the result of the global economic downturn. As a consequence, the company is facing a severe capital shortage. The company needs a strategy to help it survive this difficult situation. This paper addresses ways in which the management team can respond to these challenges across cost reduction, revenue generation, and longer-term strategic positioning.

Scoping the Problem

The management team must be able to address the entire scope of the problem. The situation is severe enough that the company is in jeopardy, so anything short of a total solution carries the risk of failure. A management team that implements only a partial solution may not make the changes necessary to save the company. The scope of the issue spans the entire organization. A severe capital shortage not only requires the cancellation of any expansion plans, but also necessitates curtailing much of the firm's development activity.

Reducing Direct and Indirect Costs

Management of SMEs often remains aggressive during a slowdown (Rasheed, no date); however, in this situation the company's existing burn rate is not supported by revenue growth. The size of the company must therefore be contracted before any aggressive strategy is adopted, lest the company become insolvent. There are two core components to this recommendation: direct costs and indirect costs.

The direct costs consist mainly of staff associated with servicing the two customers that have been lost. Those staff members are now superfluous. If the firm's financial condition were strong, perhaps those employees could be retained or redeployed; given the looming capital shortage, however, they will need to be let go. This will alleviate the capital shortage to some degree. During this process, top performers from those divisions could be redeployed to other divisions, with cuts in those other divisions targeting weaker employees who become redundant as a result of the redeployment.

The indirect cost structure must also be addressed. Overhead must be reduced to reflect the new, smaller size of the company, and the cuts should be at least proportional to the amount of business lost. This will involve identifying both personnel and physical costs to be eliminated. The company's decentralized work teams mean that building-related overhead is lower than for comparable firms, but a small centralized infrastructure still exists. This infrastructure should be retained to the extent possible, since the company is expected to grow again once the economy improves. New job requirements will need to be drawn up to ensure that the smaller staff can cover all work required for the remaining clients. If direct and indirect costs are scaled down in line with the loss of business, this should be sufficient to alleviate the capital shortage.

Conclusion

Management is in a difficult situation. The company needs to be contracted in order to alleviate the capital shortage. This will involve a quick downsizing of the firm's operations, at least in line with the revenues that have been lost. Care must be taken to retain the best staff, even if it means significant shuffling of employees and duties. The company should also pursue new revenue streams, although the lead times associated with the courseware industry make substantial short-term gains unlikely — if strong revenue streams existed, management should have tapped them already.