Are You Ready for the Next Recession?
November 25, 2019
By Kevin Burke, CTP of Burke Advisory Services
Our economy has been experiencing one of the longest expansions in history. But historically what goes up … must come down. When it does, will you be ready? Remember 2008? For many businesses it was a low point. The next downturn could be just around the corner. We don’t know the date, but we do know it is almost certain to happen! Chances are that your business is not as prepared as you would like it to be. CEOs, owners and managers of businesses, no matter how successful, have a responsibility to employees, vendors, creditors and shareholders to prepare for, and avoid, both external threats and internal weaknesses.
Examples of external threats are:
Economic downturn (What goes up …)
Trade issues (i.e., tariffs & taxes)
Industry/product obsolescence and new technology
Competition (New or established)
You can’t control external threats, but you can make sure that you have sufficient advanced warning and have strategies in place to mitigate their effect on your business. Study these and develop contingency plans.
Examples of internal weaknesses:
Poor customer service
Lack of employee alignment
Ineffective financial management
Unlike external issues, you have control of your internal weaknesses. Some may be small and immaterial. Others, like the ones listed above, can be critical. These are all-hands-on deck types of issues. It is very difficult, for example, to recover from ongoing poor customer service and quality issues. Although, I have done it. Your business should be constantly striving to be the best in class.
We live in a litigious world these days. Make sure you have proper policies, procedures and insurance in place to cover you should the worst happen. Are all of your employees each pulling in the same direction? Do they all have a clear understanding of the company’s goals and how their particular work achieves those goals? It is difficult for a team to pull a load if everyone is pulling in different directions. This may seem unimportant for some. I assure you it’s not.
This brings us to one of the most important areas when preparing for the future:
For most people the art of financial management may seem esoteric at best. Most owners are not trained financial managers. this can become a problem as your business grows. Proper management of your balance sheet can drive profitability, value and cash flow. So, where to start? I recommend having an assessment performed that will yield a detailed financial analysis, as well as benchmark your business against historical and current metrics from the same industry. Fortunately, there are low priced easy to use tools to help you manage finances like a pro. Why hire a top-shelf financial pro for $150 to $250 an hour when you can use an off-the-shelf assessment tool? Use the right tool and follow the recommendations. Even companies that have a full time CFO can obtain great value from a thorough financial assessment. Remember, an assessment is essentially an objective, third party opinion. A good one will provide you with actionable items to improve profits and more.
Use this assessment and its findings to determine where your company is financially, what direction you have been heading in and where you need to go. A good assessment tool* will tell you this. Considering what is at stake and how much time, effort and money you have invested in your business, it is foolish not to obtain and use detailed financial recommendations to make critical mid-course corrections. We have an assessment tool* that is quite reasonably priced and can even include the assistance of a qualified consultant/analyst to guide you. I have always found the cost of a good assessment to be recovered very quickly by following the recommendations. Once you know the lay of the land so to speak, it’s time to roll up your sleeves and get working.
Focus on maintaining adequate liquidity and working capital. Tighten up on collections and don’t pay bills early unless you are getting a good discount. When is the last time your company performed a physical inventory? If it is more than 12 months ago, do it now. If your inventory is too high, you can convert the extra amount into cash for working capital. If it is too low your cost may be higher than necessary and customer service may be suffering. Is your debt properly structured? You should have adequate borrowing capacity for those times when you really need it. Also, the amount and repayment terms should match the collateral assets and the cash flow they produce. Stay close to your banker and ask for their advice. Understand what your company is worth now, on paper, and in the real-world marketplace. Learn what you can do to make it worth even more. Stay focused on your financial goals and review your progress at least quarterly.
Kevin Burke is a member of the Turnaround Management Association and a Certified Turnaround Professional. A graduate of the Villanova School of Business, he has over 35 years of experience in banking and executive management. His management consulting practice is located in Troy, Michigan.