Smart strategies: Prepare now for the next economic slowdown
Business owners and their executives have a responsibility to anticipate multiple scenarios that could disrupt their company’s success.
I advise having a pre-determined action plan for the unforeseen event(s) or conditions that could derail them in working toward their objectives. These plans work toward surviving a major economic downturn.
When the business is doing well, these risk mitigation strategies often tend to fall off the “to-do list” and may not get completed at all.
In my experience advising clients, I have found business owners feel the pain of losses more than they do the joys of any gains.
These painful feelings may impair you from making rational decisions during times of economic turmoil.
According to a September 2018 special report from CalChamber, “The United States is currently in the midst of the second longest expansion in the nation’s history at 111 months and counting. In July of (2019), we will officially be in the midst of the longest expansion on record.”
I believe no one has a crystal ball to accurately predict the timing of the next slowdown or when the next recession will occur, but I do find it critical to prepare for it.
POTENTIAL ECONOMIC HAZARDS
Consumer spending is a vital part of the American economy and thus large contributor to gross domestic product (GDP). Though it varies by year, consumer spending accounts for approximately 70 percent of the U.S. economy, according to data from the Federal Reserve Bank of St. Louis. Monitoring the underlying drivers of spending can be helpful as you consider the probabilities of future outcomes.
It has become common for customers to purchase items using credit cards. This can be an efficient way of buying products if fully paid off when the bill is due. The problem comes when those customers do not pay their bill in full.
Credit card debt in the U.S. peaked at $1.02 trillion in May 2008 before falling off during the global real estate crisis. It eventually hit a low of $832 billion in April 2011. However, according to the Federal Reserve, as of August 2018, credit card debt has now climbed all the way back to a record level of $1.04 trillion.
Business owners and their executive team should look at their operations and balance sheet to determine, should a slowdown or recession occur, if they are in a strong financial position to survive.
To work towards your slowdown plan, consider these five steps:
Review Data // Monitor your core (sales, production and operational) performance metrics enabling real time adjustments.
Plan Ahead // Construct a detailed plan should the business experience a 5 percent, 10 percent, 20 percent drop in sales. Visualize the ramifications to the business should this occur & what reductions specifically, if any, will logically be needed to stay profitable and current with bills. I would also advise having an appreciation of what your key customers will endure and its impact to your business.
Improve Balance Sheets Now // Previous recessions have shown that companies with strong balance sheets, lower debt ratios and untapped lines of credit were better positioned to maneuver through greater financial flexibility.
Monitor Accounts Receivable //
Previous recessions have shown that businesses can quickly become cash-strapped. This makes your customer’s ability to pay your invoices more difficult to pay in a timely manner or at all.
Banking Relationship // It is crucial to have a strong personal banking relationship. A fully transparent, communicative and consultative rapport with your bank may enable you to adjust as needed that works towards best positioning your business for success. Take a moment to evaluate your current relationship.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.