Recessions are inevitable. Yet at moments when you’re flying high, enjoying soaring sales and massive profits, it’s easy to forget that things always contract. Warning signs are already on the horizon, despite stellar numbers for 2018. The Chinese stock market declined 30% in 2018, and the TSX fell by almost 12%. Nearly half of executives, according to a recent Duke survey, think we’ll enter a recession this year. Eighty-two percent predict one before the end of 2020.
Here are four strategies to help prepare your business for a future recession – and help improve its value in the process.
Most companies operate with relatively low margins, and little room for error. Even a small decline in revenues could damage your bottom line. You need a contingency plan for producing short-term profit when revenues drop. Do the following:
- Build optimistic, worst-case, and realistic forecasts.
- Construct contingency plans that your managers are prepared to implement.
- Define early warning signs with the input of management.
- Adjust discretionary spending at frequent intervals if necessary.
- Keep bankers and investors apprised of actions you can take in the event of a downturn.
Identify Your Strengths to Retain Your Best Customers
The strengths that have enabled you to succeed can also help you weather storms. Which capabilities do your customers most value? What helps you stand out from the competition. Identify your highest value customers, and ensure you’re doing everything right for them. Develop a plan to keep them on board even if there’s a downturn. You need to be indispensable to them. If your belt must tighten, shift your focus to these customers rather than cutting costs across the board.
Trim the Fat
Companies that offer real value are experts at stopping that which does not add significant value. Be prepared to change your cost structure to offer greater value and trim the fat. Your contingency plan should itemize the things you can cut. Focus on things that are nice but unnecessary, that are in place because of tradition or sentiment, and those that worked once but no longer worked to create value.
Know that cutting costs always presents challenges. Most organizations aren’t good at slashing expenses, and management often works to protect their own people. You must be prepared to cut anything that’s not critical. You may also want to outsource strategic functions, such as bookkeeping and legal management, that don’t have to be done in-house.
Carefully Manage Liquidity
When the economy contracts, you must manage not only negative growth but also constraints on liquidity. With less revenue, trying to maintain liquidity can prove challenging. So develop plants that:
- Collect money from customers faster. Early pay discounts and deposits can help.
- Optimize cash flow by narrowing the gap between sales and outlays for advanced costs, such as inventories.
- Work with suppliers to distribute risk.
- Monitor receivables against payables. Then reduce cash conversion cycle days.
Ultimately, survival may require a willingness to shrink. Advanced planning can feel daunting, and you must avoid cutting that which makes you profitable. Seeing your business through a serious crisis demands some exceptional management skills. Growth will not save you, but disciplined decision-making just might. Whether the recession comes this year, next year, or a decade from now, preparing now can help you weather whatever storm swirls ahead.
About SVG Capital Group (www.svgcapital.ca)
SVG Capital Group is a firm of market-driven transaction advisors focused exclusively on the purchase and sale of mid-market businesses and the raising of debt and equity capital. SVG Capital Group and its advisors have over 50 years of experience in valuing and advising on the buying and selling of businesses throughout Canada.
Our team of M&A advisors have over 50 years of experience in valuing and advising on the buying and selling of businesses. Our success is based upon maintaining an extensive network of contacts and potential buyers across Canada, the United States and around the world.
SVG Capital Group’s Deal Team
Donald M. Spence Derek M. Sanders
Managing Partner Partner