If you follow the stock market, or frankly any financial news lately, you’ve certainly noticed the volatility and overall pessimism of financial pundits. The Dow 30 index has seen multiple significant daily declines in 2019, with 2018 ending as its worst year in a decade. Headlines express concern around tariffs, the U.S. dollar-Chinese yuan exchange rate, Fed rate decisions and expectations, an inverted yield curve, investor surveys and various other reported maladies. With the U.S. in the midst of the longest period of economic expansion in its history, many believe that we are simply due for a downturn.
While RKL Wealth Management remains bullish on the U.S. economy and the stock market, the current market sentiment is a good reminder to private businesses to ensure they are well-positioned to weather the next downturn, whenever that occurs. Below, we highlight six areas that are key to preparation.
- Working capital strength
If you’re in the manufacturing, distribution or retail industries, chances are much of your capital is tied up in inventory. But are you stocking too much inventory relative to your lead times? Inventory means cash – and without a sale, that’s cash you can’t tap into. If the market is poor for sales, that cash is sitting in your warehouse, unable to fund operations during tough times. Good inventory management is always prudent, not just in times of uncertainty. To achieve this, you must first deeply understand your supply chain: who your suppliers are, what your options are, what lead times are required for you to place an order and what you can be doing on the customer side of things. Try speeding up turnaround time on purchases from suppliers so that you have an item on hand when needed without actually having to stock it yourself. Or, request additional lead times from your customers as a point of negotiation. Abbreviating that purchase to delivery cycle ties up less of your money in inventory.
- Collection & payment policies
Are you lax on collections and allowing customers to finance their purchases free of charge? Just like inventory, it is important to avoid tying up cash in accounts receivable. Think about it: You’ve made the sale, but you can’t do anything with the cash until you have it on hand. Now, you’re stuck waiting to be paid. Consider your current policies for collection: Do you have a 30-day payment policy, but don’t actually start reaching out until 45 days? It is important to understand the industry norms, including competitor policies, and adjust yours accordingly. On the contrary, think of your own payment policies in reverse. While you want your customers to pay fast, it may be beneficial to your own business to take its time in paying vendors. Unless there is a discount or offer on the table for paying early, all you’re really doing is speeding up their cash flow and reducing yours.
- Fixed vs. variable costs
Take a look at your operations and ask, what expenses are luxuries and what could be trimmed without impacting performance? No matter your sales volume, fixed costs will remain the same. Variable costs, however, will change depending on your level of sales. Take manufacturers, for example – their building costs are generally the same whether unit sales are up or down. By contrast, variable costs, such as production materials, could change tremendously. Your variable costs will take care of themselves – if your sales are down, you’ll likely be buying less materials. Your fixed costs, on the other hand, often have the potential to be reduced or eliminated – a tough decision to make, but one that can often give you more bang for your buck.
- Workforce & internal functions
In a downturn, many businesses focus on layoffs. For the opportunists though, this is a chance to pick up talent that can drive long-term value. As others reduce their headcount, be prepared to take advantage of an employer-friendly job market. At the same time, consider outsourcing some of your business’s functions so that you can focus on its core competencies. While most business owners are great with their product, customers, suppliers and operations, they often lack the breadth of experience, time or resources to properly dedicate to human resources, accounting and other back-office functions. Outsourcing allows you to tap into an expanded skillset, while at the same time reducing a fixed cost component of your business that can be more easily scaled back in tougher times.
- Customer acquisition & retention
In tough times, your competitors are likely tightening the belt, too. As a result, their customer service or responsiveness could slip. This is an opportunity to set yourself apart and really shine. Previously, we discussed trimming your costs. However, it’s worth it to take a look at your operations and consider the trade-off: keeping some of those costs in place if they offer a competitive advantage. This may sound contradictory, but think of it as a chance to pursue new customers who are frustrated with their current supplier or served by floundering competitors.
- Operational efficiency & timely financial reporting
By operating your business efficiently in good times, the adjustment in bad times will be less of a change. Ensure a solid supply chain with vendors that will withstand a down economy. And, take a good, hard look at what lines and products/services are profitable. Where are you making or losing money? Timely and accurate financial information is crucial in making informed decisions – especially in tougher times. It’s not just about having a fat balance sheet, but rather the ability to maintain an efficient sales and cash conversion cycle. By creating healthy habits when things are going well for your business, you’ll be in a much better position when the going gets tough.
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