The current media is full of warnings that an economic slow down is coming but what does that mean? Is there a recession looming? When and how big? Nobody really knows so how do you prepare? What are the early warnings signs that you should look for?
Here are some early warning signs that you may see in your business or in the community around you:
- Customers are placing smaller orders and pressing for price reductions.
- A few key customers are taking longer to pay invoices.
- Your sales people are finding it harder to get appointments and the sales backlog is declining.
- Your banker starts asking more questions about your business and more often.
- Customers increase the use of credit cards for payment.
- Your suppliers inquiring about faster payment or offering special deals for you to buy faster.
- Increased concern among your peers at events where many are talking about their business slowing.
You can take actions to protect your business, but you need an overall plan to make sure you don’t scare your employees, suppliers and banker. Some actions should occur while your business is still strong and before sales begin declining.
- Review inventories and get rid of slow-moving stock while there is still some market for it. Once a downturn is evident, there will not be a market for it. Creating cash is more important than profit on the sale.
- Look at surplus equipment that can be sold that provides some cash. This is the same story as excess inventory.
- Use the cash from steps 1 & 2 to reduce debt. Excess debt becomes a real burden when revenue declines.
- Have a human capital plan the targets which people leave first if an economic slowdown hits you hard.
- Have a plan to increase sales efforts, increase attention to key customers and protect your market. There may be opportunities to gain market share from competitors that don’t plan.
- Have a thorough cash forecasting process to identify potential issues 12-26 weeks in advance. Once you know this, you have a chance to enact steps 1-5 early and limit your rate of cash burn. This greatly adds to your ability to sustain the business through the hard times.
Paying attention to early warning signs and developing a plan of action steps will give you a competitive advantage. Over the last 5 years the economic tide has raised all boats but many who are doing well now will not have a clue of what to do as they encounter the inevitable downturn/recession. Your plan and willingness to make changes before real pain hits your team gives you an effective competitive advantage.
C Squared Solutions offer fractional CFOs and COOs for middle market businesses. We have successful track records in helping owners build business plans that survive and flourish. Give us a call and let’s discuss your concerns.