By Rick Wirthlin
It’s impossible to predict exactly when the economy may slow down, but with some economists forecasting a downturn on the horizon, business owners can prepare for potential shifts.
Here are eight proactive strategies that can help position your company to prosper through the next slowdown, whenever that may occur.
1. Stress-test business cash flow
Just as banks run stress tests on their balance sheets to predict the impact of potential loan losses, businesses should consider worst-case scenarios that could occur in a downturn. If your sales dropped 10, 20, or even 50 percent, how would that affect your cash flow and your ability to maintain operations? Understanding these risks and putting contingency plans in place to mitigate them is critical.
2. Reduce expenses
Closely examine your costs and identify opportunities to eliminate unnecessary expenses. Start by shopping around for best prices from vendors and suppliers, including insurance policies like health care coverage. Can you hedge any raw materials? If you’re buying diesel fuel, consider buying it in the futures market to fix costs and avoid price increases.
3. Right-size your operations
Evaluate your headcount, your fleet, and other assets while times are still good. As tight as the labor market is today, it’s imperative to have the right people in the right roles. Decide which capital expenditures, such as new equipment purchases, can be delayed (or leased) until the economic slowdown passes.
4. Free up cash
Now is the time to refinance debt and negotiate lower interest rates to boost your financial flexibility. Reducing your loan obligations will help improve your overall cash flow. If you have debt with short-term amortization, ask your lender to extend your financing terms to reduce your debt service requirements, which can improve your cash flow. Lock in or increase lines of credit so you’ll have access to cash when you need it.
5. Adopt a growth mindset
Preparing for a downturn isn’t just about cutting costs. More importantly, it’s about increasing revenue. Focus on driving additional growth through diversification, and leverage your competitive advantage to tap into different customer bases or industry niches. Specifically, M&A opportunities can offer synergies to diversify your business and help to bolster against economic swings.
6. Take advantage of technology
Digital disruption is reshaping every industry, and the next downturn could magnify these advantages. If you’re not innovating with new technologies to streamline your operation, grow revenue, and set your business apart, you’re already falling behind.
7. Think ahead
Whether you’re downsizing or expanding, it’s important to have a long-term vision that will outlast the next economic cycle. Don’t cut your best people or ignore your biggest revenue opportunities if they’ll give you a sustainable advantage down the road. At the same time, don’t grow too fast now if it will stretch you too thin if the economy takes a turn.
8. Check your blind spots
Once you have a plan in place to navigate the next economic cycle, put it up for review. Ask your board of directors, bankers, attorneys, accountants, and other consultants to take an objective look at your plan. These professionals can review your plans and share best practices that can help you prepare for whatever the economy may bring next.
Planning ahead may help your business weather economic volatility and thrive despite it.