An honest downturn assessment
Managing any downturn starts with asking questions about your business strategy:
- What are your industry prospects? Businesses in mature, cyclical industries (for example, auto dealers) can expect to be disrupted during a slowdown, whereas innovative businesses may adapt better. Technology businesses fared well in the Great Recession and saw market concentration grow 10% in the COVID-19 recession.Disclosure 3, Disclosure 4
- How nimble can your business be? Slowdowns might require you to reduce risk and stretch cash. Consider whether you’d be able to ramp down high investment or expansion plans quickly to refocus on stability.
- Where is your business most vulnerable? Downturns can cause dips in sales that can be exacerbated by the loss of key customers or outstanding payments. Suppliers’ or partners’ weaknesses might be transmitted to your products or services. You may also face a reduced on-site labor force.
- What resources sustain you during a downturn? Liquidity is invaluable during tough times. Multiyear contracts with financially sound customers can keep the business going in a slowdown, as can flexible vendor contracts. Additionally, a robust technical infrastructure can help you support your employees and adapt to your consumers’ demands.
5 lessons for staying ahead of the curve
When planning to avoid a business downturn, consider these five approaches.
Rethinking risk readiness. Amid economic constraints, business leaders must look for opportunities to assert control and make financial health a top priority. Launching a bold initiative—whether entering a new market, opening a new facility, or acquiring a competitor—can hinder your strategic maneuverability and sap your reserves. Adjusting your mix of initiatives and risks can position your company for success after a downturn.
For example, middle market businesses can focus growth initiatives on introducing existing products or services to new customers, versus developing entirely new offerings. These more restrained moves help minimize risks and keep spending in check in the face of economic uncertainty, while still paving the way to grow sales.
Securing capital for the downturn. Access to liquid capital is the best asset for an owner during a slowdown. In addition to building up cash reserves when possible, securing credit through equipment loans, lines of credit, commercial mortgages, and more sets up capital access that owners may need. Finding equity partners ahead of time or securing a next round of capital are additional methods to make sure your business has the resources it needs to survive the slowdown.
- Fine-tuning cash flow. Converting receivables to electronic payments can reduce days of sales outstanding, keep cash flowing, and prevent customers from stretching payments—you’re essentially borrowing money from your business. Inventory automation as well as reduced output and inventory waste could lower your cash needs, putting you in a stronger financial position.
A detailed review of expenses and vendor pricing, a revised budget strategy, and more disciplined forecasting are ways to help tighten your business’s cash consumption. Battening down the hatches in the best of times will help prepare for the worst.
- Weighing new opportunities. Downturns offer businesses the chance to create value, including in the following areas:
- Labor and employees. The silver lining of mass unemployment is a rich supply of skilled candidates. Take advantage of this reserve to attract diverse, qualified employees and to upskill your current workforce to keep up with industry trends. Don’t forget to consider the implications of a remote portion of your workforce.
- Expansions and partnerships. If your downturn assessment makes growth attractive, consider investing in new initiatives to not only expand your business but also capture market share. These may include new marketing and sales strategies, pricing adjustments, public-private partnerships, or even mutually beneficial acquisitions.
- Materials and services procurement. Respond to disruption by evaluating each point in your supply chain and associated contracts. Consider collaborative contracting to secure immediate deals, extend your partnership, or inject greater flexibility.
- Equipment or real estate purchases. Large asset purchases like durable equipment and real estate often suffer from reduced demand and offer sales. Prepare for bargains.
- Capital structure. Business slowdowns can drive down the cost of capital. Think about contacting your banking relationship manager to revise your capital structure to offer optimal flexibility.
- Keeping the long view in sight. 88% of commercial businesses plan to engage in financial goal setting in 2021.Disclosure 5 Even though conditions around capital access, high valuations, and M&A market activity have changed rapidly, business owners can still consider the longer-term strategic implications of company mergers, divestitures, and pursuit of initial public offerings.