The Recession is Coming, The Recession is Coming – Part 1

Author: Larry Chester, President

The market has hit dizzying heights, the tax bill has boosted corporate earnings, and consumer confidence is up. The effects of International trade trickle down to the small businessman. We all recognize that as the economy goes, so goes the small business. Whether your business is B2B or B2C, it doesn’t matter. You will benefit or suffer just like everyone else will, when it happens. Of course, I mean when the Recession hits.

But things are going so well!! Everyone realizes that there is a business cycle. During the highs, many companies succeed in spite of themselves. Some will make decisions with long term commitments or consequences. Some will hold back, not riding the monetary wave, but being just a bit conservative – just in case.

Whether it will happen in the next week, the next month, or the next six months, the economy will slow down. Maybe a little, maybe a lot. But whatever happens, you need to prepare to protect yourself from the dire consequences that can affect you, your business and your employees. Here are some things to think about to get ready for the Recession.

• Accounts Receivable

• Manage your Accounts Receivable. Cash is king. I’m talking about the cash you get from your customers when they pay their bills. Take a serious look at your AR. What percentage is over 60 days? What percentage is over 120 days? What percentage is so old that it is unlikely that you’ll collect it?
• Write off your bad debt – You need to know what your actual AR balance is. I have clients that never write off their bad debts, because seeing a large number on their balance sheet in AR makes them feel good. I don’t know why, because the number isn’t real. Plus, it doesn’t make the bank feel good. They will consider anything over 90 days as uncollectible. Honestly, you might collect some of that. But when it goes over 120, your chances are increasingly slim.
• Beware of customers that start paying late. Identify when your customers are typically paying their bills. Watch out for the slow but insidious lengthening of that payment cycle. If they’re short on cash, you may be the first one that they start to stretch out. First it might be only a few days, then a week, then two weeks. They are telling you something. Don’t let it go unnoticed.
• Be wary of customers that suddenly place larger orders than they previously had. If they are selling through, that’s great news. But what if they are just building stock, because they recognize that they won’t be able to continue to pay their bills? They may be building a hedge against your not shipping to them. You won’t ask for the inventory back, so they consider this a great move. Not so great for you.
• The squeaky wheel gets the grease. Call all of your customers who are late paying their bills. Stay on top of your collections. If you’re giving people 30 days to pay their invoices, call the customers before large invoices are due, and ask them if the invoice is in AP for processing, and whether they will be paying it next week, in accordance with their terms. They won’t get upset, but they will take notice of your call. If you check on the payments in advance, then you’re not making a collections call, you’re just checking to see if your invoice has moved through their process or not.

• Inventory

• Service businesses have inventory, too. The hours that your staff work is your inventory. It is volatile. If it’s not used – POOF – it disappears. It becomes an overhead item instead of a COGS item. This is no small matter. Track utilization of your staff. Do you know how much “unused” inventory you have wasted?
• Know the actual value of your inventory. Compare an inventory value report to your balance sheet. If it doesn’t match, something is wrong. You need accurate numbers, or you can’t plan.
• How much money is tied up in the wrong inventory? Track your inventory turns. This is a major issue. How fast do you sell the inventory you have in stock? You need to track that by item and item group or family. If you don’t, you might have a lot of money tied up in inventory that you aren’t selling. When the market goes down, the slow-moving inventory is going to be even harder to sell. Determine what is slow moving inventory, and reduce the investment in that inventory.
• What is your historical inventory level? Is your inventory higher in anticipation of upcoming sales growth? Did you buy more inventory to get a larger discount? You will want to reduce your inventory before a recession hits. If a recession comes calling, your sales will drop, and you may have extra money tied up on the shelf.
• How quickly can you restock? If you are going to be more conservative in running your business, you need to reduce the inventory you have on the floor, and concentrate on your supply chain, to assure that you can get what you need, when you need it, rather than having it waiting, gathering dust on your warehouse floor. Ask your major suppliers if they will hold inventory for you, ready for shipment.

Next month I’ll show you how to best manage your use of credit and keep your overhead expenditures in check, in addition to other ways to prepare your business for when the next recession hits.