Are You Ready For The Next Recession?
I am going to predict the next recession. I do not know when it is going to start, or how bad it is going to be, but I know that we are going to have one in the future.
Is your business ready? Will it survive? Will it be in a position to be opportunistic? Will your bank continue to extend credit? Will your bank renew your line of credit and other loans? Will you have enough cash?
Now is the time to prepare for a downturn in business. Following are some of the things you should consider doing now to prepare your business for the next recession.
- Reduce debt. Make sure your line of credit is zero at least part of the year.
- Collect past due receivables. There is no better time than the present to collect your receivables. The older they get, the harder they are to collect, particularly as the economy deteriorates.
- Clean up inventory. Sell the slow moving inventory and throw out the obsolete. Like accounts receivable, inventory does not get easier to sell over time, it will get harder, and it’s taking up valuable space. Quantify total write-offs and write downs and share with your bank the financial impact, and the quality of the remaining inventory.
- Work with conservative and experienced bankers. Aggressive bankers may overreact in a downturn.
- Over time, try making employee compensation more variable. If business is currently strong, use bonuses and profit sharing to motivate and reward employees. Raises are considered permanent and are difficult to take back when times are tough. Bonuses and profit sharing can be reduced or eliminated in a business downturn.
- Develop a plan for a downturn. As part of the annual budget process, recast your budget with a 20 to 40% sales reduction. How will you respond? How will you reduce your costs? Which costs are fixed? How low can sales go before you are losing money? What are breakeven sales after cost reduction efforts have been implemented? What is the impact on cash and loan covenants? Can you reduce inventory and receivables, and pay off your line of credit?
- Watch your personal lifestyle. Can you reduce owner compensation and draws, if necessary?
- Cut expenses now. Outplace unnecessary and marginal performing employees. They will have an easier time finding employment while the economy is good, rather than in a bad economy.
- Shop vendors every three years. This will keep pricing competitive, and improve the quality of goods and services.
- Use long term debt whenever possible. Resist the temptation to use your line of credit or cash reserves to purchase capital assets.
- Watch pricing and margins. Raise prices where appropriate. You will improve earnings and cash flow. You will not be able to raise prices in a downturn.
Businesses with strong balance sheets that are prepared can be opportunistic during a recession. Rather than be weakened financially, prepared companies can increase market share, hire top employees and acquire assets at bargain prices.
George A Bares, CPA MBA
Partner, B2B CFO