The Recession is Coming, The Recession is Coming Part 2

Author: Larry Chester, President

We truly don’t know when the recession is coming. It might be in six weeks or six months. But historical financial records show that one is coming. So, how can you prepare your company to better handle the recession when it does come? Last month, I discussed how carefully managing your Accounts Receivable and Inventory can help prepare you for what’s coming. This month let’s take a look at some other crucial business matters.

• Manage your use of credit

• Carefully use your credit line. A credit line should never be used to cover operating losses. If you are near the top of your credit line, then you lack the ability to draw when you actually need it. Plus, if you are on a borrowing base, you can be heavily impacted if your sales and therefore your AR drops significantly. With lower availability, you might get a call from your banker. If he tells you to pay down your credit line so you stay in formula, that can be really bad news.
• Your credit line is your lifeline. If business starts to slow, you need that cash cushion to cover your needs until you can build sales again. If you are stretched, or over-advanced, you are going to be in a difficult position when the bank comes calling.
• Consider terming out your operating line. Interest rates are rising, and your operating line interest is variable. As interest rates climb, so will your monthly interest payments. You might be better off getting a term loan at a fixed rate to pay off your credit line, setting up standard monthly payments. Plus, your credit line will be zero, giving you opportunities to draw on it if your business needs the cash to operate.

• Plan to Reduce Staffing

• If your sales shrank by 25%, would you still need all those people? Probably not. It’s not unusual for a company to add staff during a growth period so that you don’t have to rush to find and train the right people as you continue to grow. But what happens to those people when sales drop? Plan for how your company should be staffed with lower sales. You need to be able to make the hard choices. It might come down to protecting your company or your employees.
• Reorganize your company. Think seriously about what positions can be combined or eliminated. This isn’t just a matter of numbers, it’s a matter of how efficient your company is. Can you eliminate or combine steps in your operational flow that would result in jobs being combined? Cross train your staff so that if someone leaves or gets laid off, someone else is ready to fill that role. Detailed knowledge of how your company works is critical to moving forward.

• Overhead expenditures

• If you rent your space, you might want to prepare to have a conversation with your landlord about reducing your rent payments. If you get into real trouble, he might not be happy, but it would be better than losing a tenant.
• If you own your building, consider refinancing. Interest rates are already rising, but you might be able to lock in a fixed rate on a longer term that would reduce your monthly payment to the bank.
• Bulk purchasing of Utilities. If you aren’t already buying Natural Gas and Electricity from a broker, you should look into it. You might be able to save 10 to 20% a month on your utilities by going to a bulk company, and by signing a multi-year contract.
• Insurance expenditures. Consider changing your business and health insurance. There may be significant differences in costs based on limits and increased deductibles.

• Customer concentration

• How many customers control 80% of your business? One client had two customers – Sears at 75% and Grainger at 25%. That didn’t end well. Find other customers that will change your balance of sales. Remember Pareto’s Law. 80/20. Eighty percent of your business will come from 20% of your customers. That’s too high a concentration considering that the economy might slow significantly.
• Specialized inventory for a unique customer creates risk in the event that their sales slow. Who else do you sell it to? Unique product or branded product might be impossible to sell in a distressed situation, so control your inventory, or have your customer “pre-buy” the inventory that you’re holding for them.
• Explore additional channels of distribution. Selling your products on Amazon.com, Ebay or other on-line services might be an option to reduce excess inventory. This is true for B2B and B2C businesses.
• Collections can quickly become problematic if your biggest customer gets into trouble. It might result in them forcing you to longer terms – stretching from Net 30 to Net 60 or Net 90. That could create a short-term cash crunch until they start paying their bills again.

When the business climate slows, it affects everyone. For those who have been riding the wave, it might come as a shock. But you can prepare for it and reduce both your financial and business risk. These are just a few of the ways that you can conserve your cash, reduce your risk, and prepare for difficult times. Now is not the time to buy new equipment, move into a new office space, do significant remodeling, buy new office furniture, or add expensive new software to your business. Now is not the time to make new, expensive, long term commitments.

I’m not suggesting that you find a cave to hide in. Just make sure that any moves you make right now are prudent, without long term commitments, enabling you to react to a change in the business climate.

In past recessions, the businesses that planned for it were able to sustain themselves during the difficult times. Some were able to buy equipment at a significant discount, take on new customers who found their key suppliers unable to respond, buy other businesses that allowed them to expand into new markets. But to do that, they were in a strong cash and business position. It didn’t happen by accident. By taking the time to plan, you can prepare for, and maybe even take advantage of, the upcoming recession.