The Recession-Proof Business Primer
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There have been few times in our history that have challenged business owners more than the economic uncertainty which prevailed in the latter half of 2008 and into 2009. They were arguably the worst years for the economy since the Great Depression. Banks folded, companies closed, and many jobs disappeared.
While the economy in 2012 is not back to its former strength, it has improved enough to consider companies that are still solvent to have “made it” through the storm. What actions allowed some companies to make it through these hard times while others failed? And how should these success stories impact businesses as they continue to operate in an uncertain economy?
For answers, I turned to the advice of several of my clients, who through dedication, determination, and tough choices, have managed to successfully lead their companies through the recession.
Do not overleverage. The first key is to efficiently manage the leverage of your business. Borrowers who levered up prior to 2008 faced much greater stress when economic uncertainty set in. This resulted in more limited options in the downturn and, in some cases, resulted in the distressed sale or liquidation of the business. In order to keep your business on track, seek the opinion of your banker and other professional advisors to determine what an appropriate leverage profile is for your business.
Focus on working capital. If sales start to trend downward, it is critical to focus on managing the working capital of your business. The key is to stay on top of receivables and focus on doing business with customers who have access to liquidity to pay their obligations. Make sure that these customers are not stretching you to create more liquidity for themselves. Proper management of accounts receivable will ensure that you are able to meet your obligations on a timely basis and enable you to benefit from discounts where available. It will also lead to the reduction and ultimate elimination of any loan balances under a working capital line of credit if revenues decline due to a weak economic environment.
Manage overhead. The most difficult part of keeping your company on track is managing the overhead of your business relative to the current revenue base.
If you hit a downward revenue trend, review your numbers and try to determine if it is a temporary trend, or if the decrease in revenue is something that your business will have to deal with for the near term.
If you anticipate a continued period of falling revenue, cuts to staff may be necessary. If the decrease in revenue is dramatic enough, even core employees may need to have their hours and pay cut back to survive the difficult period. Cuts in pay should be across the board to avoid jeopardizing morale. This is painful for all involved, but if it is necessary for the business to survive, everyone should benefit in the end. When things do improve, it is important that salaries are re-adjusted in order to compensate employees for their commitment to your business.
Focus on efficiency. During periods of unprecedented growth, it is not uncommon for even the most well-run businesses to become inefficient. Any time is a good time to keep an eye on efficiency, but it’s especially important when economic uncertainty sets in and your revenues trend down. If this happens, take a close look at your cost structure and take action where necessary.
Communicate with your business partners. Finally, it is imperative that business owners keep an open dialogue with their critical business partners. This list includes accountants, key clients and vendors, and your banking partner. It’s best to be open with your partners about your financial status so that they can help you to manage, especially in a difficult environment. Take the time to let them know what you are doing to keep your business viable for the long term.
Even in the best economy, it’s not easy to run a business. However, if you follow the steps outlined above and seek guidance from your banker and other financial partners, you can make it through any difficult period and come out with a much more efficiently run business, as well as a much greater perspective on how to run your company going forward.
Chris Deisley, Senior Vice President, Corporate Banking
October 24, 2012
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