Preserving Value in a Downturn Get Prepared for the “Next” Economy
Over the past 10 years, the U.S. has enjoyed its longest economic expansion in history. Economists and Wall Street seem divided on how long it will last, but all agree that it won’t last forever.
The good news is that economic downturns don’t happen suddenly. There’s time to get ahead of a downturn, and there’s no time like the present to consider steps to preserve corporate value in case of an economic slowdown. As one wise corporate leader said, “It’s easier to build a life raft while the sun is shining.”
What’s your plan? Start by looking at the business and what drives its value. This will help you discern how and where to make changes to prepare for what comes next.
What You Can Do
Lower debt load. It’s smart to lower debt when times are good because you’ll then have borrowing capacity when you need it. If you have cash now, consider accelerating debt payments.
Visit your lenders to discuss “what ifs.” Keep in mind that it’s easier to discuss renegotiating terms and accelerating a payoff while your numbers look good. Your lenders will appreciate your proactivity and candor.
Look at long-term commitments. Look at your leases, purchasing contracts, and other long-term agreements.
Obviously, long-term contracts with your customers are a positive, so you might think about pursuing them with even more of your customer base. But what about your purchasing commitments? If the business relies heavily on imports or raw materials, current volatility might inspire trying different arrangements or new vendors.
Identify margins. What are your profit margins by segment? Do you excel at serving specific niches? Who are your most profitable customers? Who are the most disorganized, difficult, or slow to pay?
When you are aware of your margins, you can focus your energies where your returns are highest, which then puts you in a better position to ride out an economic slide.
For example, it may make sense to jettison your least profitable work sooner rather than later to free up resources for more profitable endeavors and diversify your customer list. Those new sales will take time to close. Or, if something happens that causes you to reduce your workforce, you will know where to focus your labor.
Tighten up on collections. Are your accounts receivable and customer credit terms where you want them to be? These areas are often overlooked when things are booming but can make a big difference in cash flow.
Know your customers. How will your customers weather a recession? Their performance will impact yours.
If your customers are in industries that tend to not fare well in down times—luxury goods, construction, or travel-related companies—you will need to plan for a decrease in revenue from them. If your customers are in traditionally more recession-proof businesses such as energy, consumer staples or cosmetics, your business will likely feel less of an impact.
It’s easy to get complacent when times are good—there’s plenty to focus on as the company grows. But positioning your company for the future should be an ongoing exercise, with regular executive check-ins to identify any leading indicators of economic changes or trends that might affect sales or growth.
Embrace the idea of getting nimble—being ready for whatever comes, both opportunities and challenges.
Talk to Your Advisors
Your trusted financial advisors have been through good and bad economic times with all types of companies. They have solid ideas about how to preserve value, regardless of whether the economy continues to grow or begins to shrink.