Recession-Proof Your Business

Many economists predict the U.S. economy’s decade-long growth streak is set to hit a down side soon. Of course, as a college Economics professor once remarked, “Economists have predicted nine of the last three recessions.” That is to say the exact timing of a downturn can’t be precisely projected, but, as CEOs & Owners, we know economic slumps are a fact of life when you’re running a business.

There are several best practices you can implement within your business over the next few months to identify any gaps that could hurt your financial future.   B2B CFO® recommends these steps to increase the chances that your business will remain resilient in any economic climate.

Take care of your cash flow.
Expenses are a constant, but the amount of cash flowing into your business isn’t a certainty. The best way to protect your cash flow is to promptly send out invoices and regularly review your receivables. In doing so, you might notice that some clients consistently make late payments or are flagrantly overdue. Resolve these issues before they become lingering problems. You can add a clear credit policy to your invoices, stating the payment terms and late payment consequences. Make it easy for your customers to pay and incentivize those who pay promptly. By being proactive in billing and collections, over time, you train your customers to expect that you’re on top of your business with them, and that you expect the same treatment.

Eliminate wasteful habits and expenses.
Actually, just the poor tracking of expenses is a common way businesses waste money. Money gets spent, it goes unnoticed, so your cash flow becomes out of sync. Budgets can be tapped out before people even realize an over-expenditure has occurred. Monitor everything: outsourced services, technology utilization, vendor contracts/agreements/licensing fees, marketing programs or campaigns that are ineffective. Maybe you have more staff than is needed or the technology you have invested in is too sophisticated for what you really need. As one of our clients recently lamented, “If I’d been disciplined about how I’m spending in the good times, I’d have had a lot easier time managing my way through the rough times.

Know your contribution margin.

Contribution margin represents the incremental profit generated for each product/unit sold and is computed as the selling price per unit minus the variable cost per unit. The measure indicates how a particular product contributes to the overall profit of the company. When you discover products or services your business offers with negative contribution margin, you should either fix them by increasing the price or reducing the cost or discontinue them all together.  But don’t stop there.  You should also pay attention to the product mix, and focus on upselling your existing customers or finding new customers in the higher-margin product or service lines, while at the same time finding ways to improve the low margin ones.

Take control of inventory and stock management

When was the last time you examined your inventory practices? Are you ordering excessive quantities of certain items? Could you perhaps buy certain products at a better price from different vendors? Every business has different peak times when the sales increase or decrease with large differences. Your suppliers also have their own different lead times. So, if you want to keep your business going and want to escape out-of-stock situations, then you should be able to establish how long you can restock normally and forecast the amount of time the minimum stock level will get exhausted. Establishing a concrete inventory management process could help your bottom line and avoid tying up excessive amounts of cash in stagnant inventory.

Capitalize on your current customers

Talking to your customers is a great way to size up your competitors and potentially increase sales. Existing customers are familiar with your company, and some of your loyal clients are likely more open to upsells. Some ways you can further improve existing customer relationships include offering preferred customer discounts, contacting customers once a month, show them you care and are genuinely interested in them. Seek current customer testimonials that can aid in future marketing campaigns. A great way to build that rapport and trust with your customers is to ask what are the pain points they are facing in their business, or in your business relationship with them, and then make it a point to relieve that pain if you can.

Ensure you have liquidity.

Maintain a forward-looking projection of your net cash position with frequent reviews of your cash flow statement. Detail major sources and uses of funds (don’t forget things like annual insurance renewal deposits, property taxes, etc.).  Your B2B CFO®  Partner can build and maintain these important statements and help you model ‘what if’ scenarios if the worst case happens–like your most profitable customer goes out of business or a tightening of your bank’s line of credit.  Establishing and tracking liquidity metrics alerts you to take early action to maintain a solid cash position during an economic slump.

Improve your financial management
Effective financial management is vital for business survival and growth—especially in a down economy. It involves planning, organizing, controlling and monitoring your financial resources in order to achieve your business objectives. High level things you can do for financial management improvement include identifying benchmarks for operating performance, setting goals for profitability, have a tax planning strategy in place and committing to updating your financial records every 30 days.

Seek expert guidance
Networking, hiring financial experts and setting up an advisory board are all ways you can ensure you uncover blind spots and recession-proof your business.  During tough economic times banks are more demanding on financial covenants, lenders tighten their terms, and customers drag out payments.

Taking advice from people who’ve “been there” can allow you to see gaps in your processes, tackle challenges that come with a recession, and embark on new opportunities that could help you expand and grow. Having trusted and expert outside help can be the difference between surviving a recession or going out of business.

Making these small, manageable changes to your financial habits now will give you the tools to set the direction for your business now and throughout any economic slump.  For expert CFO services, contact me today at DavidGirault@B2BCFO.com.

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