I remain somewhat concerned about the current slow down and/or recession. I remain very concerned about inflation. If you are an entrepreneurs, it is time to prepare for the worst. Here is a summary of a talk I gave to a group of printing company owners yesterday.
To get prepared for any economic downturn, it is best to think in terms of getting your financial statements in order.
First let's look at the Income Statement.
Revenues
Even though budget cutting is part of getting ready, do not cut back on marketing efforts. Now more than ever you need to stay front and center in the minds of your customers. Competition is going to get even tougher, so you need to keep your competitive edge by reminding the customers that you want their business. Many of your competitors will slash marketing budgets to save money. That will give you an advantage if you keep getting your message out there.
As part of this effort, take special care of your best customers. Make a personal sales call on them to let them know their business matters. Pay particular attention to those customers who are loyal, as their loyalty could get tested during difficult times.
As soon as you observe any increases in your costs of doing business, begin an aggressive campaign to increase prices. Frequent small price increases usually work best.
Focus on revenues that generate good margins. The goal should be to grow profits, not sales. Get rid of business that is not making good margins. When inflation heats up these accounts can quickly become money losers for you.
Expenses
Cut your overhead expenses. This will lower your break even and help buffer your profit margins from sudden price increases from your suppliers or if a major customer suddenly is forced to cut or even cancel orders from you. Overhead is your enemy right now.
Get back to basics. Look around your business to see what could be cut without having a drastic impact on your business. This may involve staff. This is painful, but may be necessary to protect the jobs of those that remain. Cut any fluff that you have allowed to creep into your expenses.
I even go so far as to tell folks to get back into your start-up mentality. Bootstrap, bootstrap, bootstrap!! This may be particularly effective in marketing. I said earlier that marketing should not be cut back. But it can almost always be done more efficiently.
Now let's turn to the Balance Sheet.
Cash
Cash is King.
Improve your cash flow. The steps outline above can help. Also pay attention to accounts receivable. During difficult times your customers will begin to slow down payments to take care of their own financial strains. Stay aggressive on collections. Use carrots and use sticks to keep their payments coming in a timely basis.
Build your cash reserves. The larger the cash war chest you have the better you can make it through sudden price increases from suppliers and sudden losses of key customers. It provides a shock absorber that you will definitely need more than once in the coming months.
Debt
In addition to building cash reserves, pay down debt as aggressively as you can. There are two reasons for this.
First, as inflation heats up interest rates may go up even faster than they have recently come down. This will effect your new loans and all of your existing debt, such as lines of credit, that have variable rates.
Second, banks will become much more strict when it comes to the covenants and performance requirements built into your loans. If you miss these numbers, the odds have increased that you will feel pressure from your bank to get in compliance. They can call in a note even if you make every payment on time if you start to fall below some of the financial ratios that are part of your loan agreement.
If I sound urgent, it is because many of these things will take some time to get in order. If I am right about the economy, you need to take action now. If I am wrong, the worst that happens is that you have significantly improved your financial conditions. That is not a bad thing even in good economic times.
