While no one knows for sure, the buzz on Wall Street is that we are headed for a potential recession due to the housing crash. Many readers are asking me what to do to prepare. The immediate reaction from most business managers would be to announce, “We must cut costs,” and, while this is certainly a prudent approach, I suggest that we focus on all aspects of the business.
We have three different types of assets providing value to our businesses. The first type is the assets found on your balance sheet — cash, receivables, inventory, fixed assets, etc. The other two are your employees and your customers. To weather a difficult business climate, a savvy manager will focus on all three. Managing Assets to Stay Afloat The first and most obvious area a business turns to is the management of its current resources. The allocation and administration of cash, receivables, and inventory on the asset side of the ledger becomes more critical during a difficult business cycle. If a company can break even, it can remain in business forever. Admittedly, that is hardly a long-term goal toward which you should strive. However, the point is that during the toughest times, this may become a more modest goal.
The management of assets has everything to do with cash flow. Frankly, the generation of profits to a specific rate of return should be secondary to ensuring a positive cash flow in your business. The management of receivables is critical to the survival of the business. During the lean times, accounts receivable must be monitored closely.
The collection of receivables is the lifeblood of cash flow. Cutting expenses is the natural place to start when attempting to improve a company’s cash flow, but too many of us neglect the regular review of our operating and administrative expenses until we run short on cash.
Management is forced to review where money is being spent and make adjustments. The most important element of cost cutting is to do it where it makes sense. All too often, when cash is tight, management cuts costs in an arbitrary manner that may be damaging to the productivity or morale of the company.
Price Cutting and Your Employees Let’s assume a customer tells you that you can have a large job if you match your competitor’s price. After analyzing the job, it becomes apparent that you will basically break even at the price being discussed. Should you do the job? If you have the capacity, do it. Even if the absolute best-case scenario is that you break dead even, the cash flow it generates will likely cover some of the fixed costs associated with the project in the first place.
This is the type of mentality we may have to adopt during the rough times but excessive price-cutting can become a double-edged sword. A company can price cut itself right out of business. Make sure this is done carefully, with the survival of the business in mind.
Your employees will either be your most valuable assets or your biggest liabilities. Communication is key. If your employees are rewarded financially during the profitable times, they will then be willing to suffer with the business during the difficult times. If not, you probably don’t want them as employees anyway.
Too often, management implements a plan to deal with difficult times and then neglects to communicate it to their employees. This is fatal. The employees are the ones who must carry out the plan. So when dealing with critical times, take the team approach so your employees know that you are all in business together. It has been said that virtually all businesses can make it in a booming economy, but only the best businesses make it during the tough ones. I believe that in the upcoming months we may all have the chance to test the truthfulness of this statement.