Business Advisor: December 2011

Four steps to help your business weather any turbulent economic times ahead

For business owners, the current economic climate has likely felt like riding a rollercoaster. Three years ago everyone was holding on tight, wondering when the worst would be behind them. For many North American companies, the implications of a slowdown were severe in late 2008 and most of 2009.

Just when things started to get better for many companies in late 2009 and 2010, they started to slow down again in mid-2011. The European and U.S. debt crises are putting pressure on Canadian companies and consumers are losing confidence, negatively affecting consumer demand. Lower consumer demand could result in lower revenue and may tip many companies into a loss position. One sign of a slowing economy is the banks putting more companies on notice for not meeting their loan and lending covenant requirements. If these companies cannot get onside very quickly, they had better find themselves a new banker. Bankers will want to take action before the economy goes into a recession.

Smart business owners need to implement strategies that will help them succeed in this new economy. The following are some practical steps you can take to help you landin a better position at the end of the ride.

1. Analyze your cash flow
Cash is the lifeblood of any business. It matters more than earnings. During the recession of 2008 and 2009, many businesses became very cognizant of their cash flow. During 2010 and 2011, some business owners may have eased up on cash-flow issues, but cash-flow monitoring needs to continue as the economy sputters along. To analyze your cash flow:

• Focus on working capital and the cash conversion cycle.
• Forecast near-term cash receipts and cash disbursements based on realistic financial projections. Keep in mind customers will start to pay their bills more slowly than usual as the economy slows down.
• Continue to reduce inventory levels and replenish on a just-in-time basis.
• Continue to liquidate other non-redundant assets to free up cash.

2. Stay close to your banker

If you have a good working relationship with your lender, you may be in a better position to renegotiate your current loan facilities. Treat your banker as a partner in thebusiness, and keep them informed of critical issues affecting the business and the industry. Over the past three years the banks have shown more patience than they are given credit for. As long as they maintain confidence in the company’s direction and the business owner, chances are the bank will stick with the business. However, if we are at the beginning of a new recession and your company has not really recovered from the recession of 2008-2009, the bank may finally lose its patience and call its loans now, when things are not too bad, rather than wait until we are in a true recession. You can continue to have the bank’s confidence in you and your business by giving them your plan for how you will fix the business, and then going out and doing it. As the economy starts to deteriorate, the bank will be less supportive of a business with owners or management who are not proactive.

3. Continue to slash costs where possible
Tough economic conditions and falling sales volumes require cost-cutting measures wherever possible. When sales volumes are expected to decline, costs need to be closely monitored. Consider:

• Reducing spending – talk directly to floor and office employees to see if there are any items that can easily be cut without affecting the sales levels of the company.
• Deferring non-critical capital expenditures in order to conserve cash.
• Making tough decisions about payroll costs. Don’t be too quick to rehire once sales volumes start to increase.

4. Concentrate on good customers and suppliers
A careful review of your customer base is critical when developing a financial forecast. If customers were slow in paying their accounts even as sales volumes were starting to increase in 2009 and 2010, it could be a red flag that these customers may not be able to ride out a new recession. No company wants to drop customers when sales are starting to decline, but it may be prudent to tighten credit terms with some customers during this period of continued economic uncertainty. You may have to sacrifice some sales levels in an attempt to prevent a bigger loss if the customers go out of business.

Continue to bargain for favourable credit terms with your suppliers, and if possible, negotiate for early payment discounts. Most suppliers will be hungry for cash. Consider whether you can slim down the number of suppliers you are currently using to qualify for larger volume discounts with your existing suppliers.

If the recession of 2008-2009 was hard on your business, you may have felt there was no big upswing once the recession ended. As a result, it may be very difficult to even think about the implications of entering a new recession. The above tips should allow you and your business to weather the possible storm ahead, and come out in an even better position. If you are concerned about the viability of your business, remember that the earlier you seek help, the greater your chances of success.

David Filice is a senior vice-president and partner in the Restructuring and Insolvency Practice of Fuller Landau LLP, Chartered Accountants and Business Advisors (www.fullerlandau.com). Contact him at 416-645-6506 or email dfilice@fullerlandau.com.