Recession is on everyone’s mind these days. The current economic climate, characterized by the ongoing COVID-19 pandemic, inflationary pressures, supply chain disruptions, and general economic uncertainty, has raised concerns among business owners and individuals. As an advisor to numerous business owners, I am often approached to provide insight into the situation. However, given the scarcity of available data and the dynamic nature of the situation, making accurate predictions can be challenging. Rather than share our predictions, we would like to provide practical advice to help business owners prepare their companies for economic uncertainty and navigate any potential financial distress. Here are seven steps to build resiliency and weather any storm that may come your way:
1. Communicate with Your Stakeholders
In times of uncertainty, the quality of your relationships with key stakeholders can make all the difference. Do you know who your key stakeholders are? What do you need from them? What do they need from you? Some examples are listed below with questions to ask:
- Customers and Vendors – Do you understand their pain points? Are you aware of how they build their schedules? What their capacity is? Do you have relationships with multiple decision-makers? Do you understand their financial strength? Do you regularly meet with them to touch base?
- Employees – Do your employees understand the vision of your company and its goals? Are they aware of how their actions have an impact on those goals? Do you have a rhythm of communication with employees? Do you use key metrics to communicate performance? Do you conduct regular employee surveys?
- Bank – Do you meet regularly with your banker and their team? Are you proactive in telling them about any potential changes to the business? Do you regularly update them on any changes to your financial forecast? Remember, your bank is a partner, and you want to keep them informed. You cannot over-communicate with them. To read more about managing your relationship with your bank, see our post, How to Engage a Key Stakeholder: Your Bank.
2. Build a Strong Leadership Team
Having the right team in place is critical, especially during a challenging situation like a recession. Ensure that your leadership team understands their roles and responsibilities, is held accountable, and has bought into the company’s vision and goals. In one of our previous blogs, Effective Leadership In a Crisis, we discuss how your response in turbulent times will define you as a leader.
3. Utilize a Robust 13-Week Cash Flow Forecasting Model
Understanding your cash flow is crucial in times of economic uncertainty. In one of our previous blog posts, How to Preserve and Improve Liquidity, we discuss how a strong cash flow forecasting model (CFFM) will help you accomplish these primary objectives:
- Predict cash flow and collateral week over week for at least the next 90 days.
- Improve decision-making at the transaction level.
- Improve communication with key internal and external stakeholders.
4. Incorporate Scenario Planning and a Rolling 24-Month Forecast
A rolling 24-month forecast model that includes a profit and loss statement, balance sheet, and statement of cash flows can help you run scenarios and see the impact of various factors on your business. By incorporating covenant calculations, you can forecast any potential compliance issues with your bank. The models should be constructed so you can run scenarios (lower sales, higher costs, extended terms, etc.) and see the impact. For more information, see our previous blog post, Business Resiliency Through Scenario Planning.
5. Understand Your Cost and Pricing Structures and Review Regularly
Many businesses do not have a process in place for regularly reviewing costing and pricing data, identifying opportunities for improvement, making those improvements, measuring the impact, and repeating. With all the disruption in the supply chain, increase in labor costs, and inflationary pressures it is critical that you truly understand the cost to produce goods or provide services and that you are regularly working to reduce these costs. Additionally, you must ensure that you are capturing cost increases and passing them on to customers when appropriate. Be sure to look at our blog about Understanding Your Cash Conversion Cycle for more info.
6. Look for Opportunities
Change creates opportunities. This may be in the form of the opportunity to acquire a competitor or supplier. It could be discounted equipment or employees that become available when another business is struggling. It could be increased volumes when another supplier can’t meet their obligations to a customer. Whatever the opportunity, you want to make sure that you are correctly positioned with the staff and resources to pursue these opportunities. For more information on distressed investing, view our webinar on Key Considerations for Purchasing Distressed Assets.
7. Don’t Wait to Ask for Help
Finally, make sure you’re not waiting to ask for help with any of the items above or other challenges you may have in your business. Lean on your advisors and business network for help preparing for the challenges that might lie ahead. It’s essential to remember that these steps are not just for preparing for a recession; they are sound business practices that can help your company to thrive in any economic climate. By focusing on strengthening your business fundamentals and taking a proactive approach to managing risk, you can set your business up for long-term success.
As a group of financial and business professionals, DWH offers expertise and support so companies can embrace change for the better. Built on a core philosophy that every stakeholder matters, we listen to those who shape a business and guide that business to its best value, outcomes, and opportunities.
All companies experience change.
Plan for it with us.