Business leaders, investors, and market watchers are increasingly concerned about the possibility of an economic downturn in the relatively near future. These concerns are further inflamed by the repetitious coverage of the topic by media. Parts of the economy may already technically be in a recession. In turn, these factors are fueling rising concerns and anxieties in business owners and executives about what this means over the next 6-18 months for their businesses.
Whether a significant downturn or recession will actually occur this year or next is still uncertain. Uncertainty and anxiety can trigger actions that bring the thing that one “thinks” is happening into reality. Executives concerned about what the future holds may begin to act and behave in a way that ultimately creates a self-fulfilling prophecy.
Below are several suggestions for businesses to position themselves to weather potential economic distress and emerge stronger on the other side. Some of these ideas may run counter to actions that initially come to mind during periods of economic uncertainty. You may get a new idea or, at the very least, get a refresh on points that will help to put your business in a stronger position to navigate possible economic choppiness ahead.
Build, Update, and Monitor a Solid Cash Plan
Developing a regularly updated, accurate cash flow plan is arguably the first thing to have in hand. Detail your sources and uses of cash to get a longer view of cash flow (commonly 13 weeks). Proactively address potential cash pressure points, such as a slow or uncertain collection cycle or potentially uncollectable balances. Accelerate your receivable collections as much as feasible. You may want to invoice more frequently or review and tighten your credit terms. Negotiate longer payment terms for yourself where possible on the payment side. Cash surprises are never helpful. All businesses have these types of issues, but they are particularly challenging in times of downturn.
Assess the Overall Health of Your Business
Having the right KPIs in place serves as an early warning sign of approaching disruptions or challenges. These KPIs could include elements such as profitability, efficiency, inventory turnover, AR turnover, sales per employee, and more. KPIs should be established at the lowest level practical to identify and understand trends and make timely, actionable decisions related to those trends. These measures should also be compared against others that operate in your same industry and sales class and/or specific industry subsets (e.g., top quarter of profitable companies, operating regions) via financial benchmarking.
Financial benchmarking against the best performers in your industry will identify key variances between your KPIs and those of the best performers. Investigate them and find ways to improve if you are underperforming in an area. Improvement may take a while, but identifying differences and variances and then assessing the reasons for them is a start. Looking for business improvement areas should be continuous, but especially in the face of a potential downturn. Optimize now.
Examine Your Talent and How Work is Getting Done
Labor is often the largest expense on the income statement. There are, however, differences on how to look at labor when downturns occur. Some businesses will jump to expectations of having to right-size or restructure the business, generally reducing labor expense. While circumstances might suggest or compel these actions, reducing employee count, restructuring, or similar significant cutbacks can also lead to a business not having the talent or resources needed when things turn around and finding themselves in a weaker position overall.
A proactive approach is to conduct a workplan analysis, a process that enables a business to identify the tasks and activities performed across its functions and consider how to best align people and improve processes. For example, one division’s sales prospects may not be as high as others on a temporary or permanent basis. If there are excess labor resources supporting that division, it’s worthwhile to examine whether those resources could be better allocated elsewhere.
Opportunities for automation are also developing in every area. Make sure you are taking advantage of what is becoming standard in your industry. A workplan analysis will give a company a visual map of opportunities to optimize the use of resources and to add resources where they are most needed.
Deepen Your Understanding of Customer Relationship Details
While this is an evergreen recommendation, a deeper dive is even more important during a downturn. For example, some client contracts may contain terms that provide extended or longer periods of credit to customers. This might increase risks of collection as their own customer financial positions decline. One potential action could be to increase billing frequency to gain more visibility to the timing and amount of credit that is being provided to customers and provide a more frequent method of communication with customers related to their total amounts outstanding. Other methods may include revisiting overall amounts of credit being extended when longer payment terms are in place, or negotiating and reducing the payment terms currently in place. Finally, as many businesses are now doing, payments may be converted from traditional checks and lockbox methods dependent on traditional mail and manual posting activities to electronic payments methods through ACH banking transactions or credit card merchant processing arrangements.
Examine Lender Relationship Details
Assess what’s happening with interest rates tied to your debt. Many lending agreements are going to be based on a percentage over a market rate, such as the prime rate. As a result, your loan interest can often change, especially in an increasing interest rate environment. One strategy may be to pursue locking in a financing arrangement that’s not as sensitive to changing interest rates. Does your organization have the opportunity to replace debt subject to variable, higher interest rates with fixed, term debt that may have a lower financing cost? A strategy like this could mean carrying more of an expense in the short-term, but one that may be worth it given the risk of rising rates. Another approach might be to pay off any existing credit that has high financing costs (similar in approach to individual consumer strategies to pay off credit cards first that carry high interest rates).
Consider New Revenue Streams
Some of the most successful businesses were created during downturns and recessions – a time when most businesses look to pull back, not invest as heavily in capital projects, and abandon some initiatives. This retreat behavior creates opportunities where others can pick up market share. A downturn or recession is a great opportunity for innovation. It can be an ideal time to assess how the business can pivot, expand, innovate, and otherwise emerge from a downturn more diversified and valuable.
Identifying new streams of revenue goes hand-in-hand with innovation. This doesn’t have to be creating a wholly new business. It could involve, for example, dusting off a previously underpromoted product or service that people are more interested in during a downturn. Opportunities like these should be examined or reexamined to see if the time is right to invest in them.
Adopt a Strong Business Operating System
A Business Operating System is essentially a “playbook” of processes, structures, and tools that defines how work gets done, sets expectations, conveys responsibilities, and keeps everyone on the same page. The Entrepreneurial Operating System® (EOS) is an outstanding example of this type of system. EOS is used by our team at vcfo and has helped thousands of businesses around the world achieve their business objectives.
The EOS concept and methodology of Traction focuses on instilling “focus, discipline, and accountability throughout the company so that everyone executes on that vision – every day.” This is especially important during a downturn, when the impacts of decisions and actions are often weightier than they would be when business was booming. Our CEO gives a lot of credit to the EOS methodology for helping us respond quickly and effectively to the recent COVID pandemic and fallout. The time to move to such a process is before you have a crisis!
Review Processes and Technology Investments
Technology solutions are a big part of today’s business workflow and may dictate to a great degree how things get done. It’s easy to become wed to technology and views of “that’s just how things get done here,” even as newer technologies and approaches show more promise. Technology solutions can require a lot of time and energy in selection and implementation. Most have moved to SaaS models and the expense goes on forever. Businesses should constantly reevaluate technology solutions and consider process changes even when they cause a technology solution change in the short term. It is important to regularly look at the overall expense of technology solutions.
Proactively Prepping to Weather the Storms
The above suggestions are good steps to take to optimize your operations at any time. The more optimized your organization, the better you will manage potential downturn or period of recession. It’s human nature to not focus as closely on areas of weakness when things are going well overall. Too often businesses don’t act on these elements until there’s a moment of looming crisis that demands attention. Sudden discussions surrounding “what do we do?” in the face of a crisis are almost always inferior to proactive planning.
Reach out to a vcfo expert who can help your company identify and execute on your opportunities for competitive improvement and optimization. We have worked with more than 5,000 business teams in our 25+ years, would love to hear your story and concerns, and share how our experience and collective wisdom can help.