Specifically those in the construction and real estate industries. After all, work is plentiful, margins are high, and generally, companies are making money. In these times, many business owners and financial executives are focused on maximizing profits during the strong economy (which is definitely important). However, what steps is management taking to prepare their companies for an economic downturn? We recommend that management develops an action plan for what will need to be done in the next economic downturn. Below is a list of items for management to consider in these discussions:
1. Keep a healthy balance sheet
- Cash is king, so make sure your team is monitoring it closely. The preparation of monthly cash flow projections is critical in managing future cash flow.
- Establish a diligent accounts receivable collection process. Collection time of receivables can creep up when times are good.
- Sell any idle assets when the economy is good. There might not be a market for these assets in a downturn when cash is tight.
- Pay down excess debt. During a downturn, cash can get tight, and having to service significant debt can be detrimental to the company and your balance sheet ratios.
- Secure a line of credit or increase your line of credit. When times are good and your balance sheet is strong, banks are usually willing to open a line of credit or increase your existing line of credit. This can be vital if cash flow becomes a problem in the downturn.
- Manage your working capital and stay liquid.
2. Know your pipeline
- Continuously monitor the amount of backlog and the time it will take to complete that backlog. What is the estimated margin on the backlog? What kind of work makes up the backlog? How healthy is the client base? Does the backlog consist of work that the Company is familiar with or is it new to the company? Assessing and analyzing your backlog will allow management to better forecast and budget the performance of the company.
3. Know your market
- Identify relevant market trends. How will these trends affect your company? Talk to other companies in the industry, what are they seeing?
4. Develop relationships
- Train, develop, and invest in your employees. If you can develop and retain key contributors in the company now, they can be vital in helping the company through a downturn.
- Build strong relationships with customers and vendors. What is the company doing today that will make your customers and vendors loyal to you during the downturn?
5. Be able to adapt
- Management needs to be able to assess the company and make changes when needed. Does the company need to downsize? Is there a division or geographic location that needs to be discontinued or significantly altered? Management should map out different scenarios and analyze the impact each scenario would have on the company.
6. Know thyself
- What are the company’s strengths and weaknesses? Determine what internal processes and controls need most improvement and how these can be used to create efficiencies within the company. Know your mentality and your risk appetite. Does the company tend to be more conservative or aggressive?
Remember that nothing can completely prepare you for a downturn. However, going through the exercises above and running through different scenarios will be beneficial when critical decisions need to be made. Use your experiences from the last downturn as a guide.
This article is intended for educational purposes only and is not a substitute for obtaining competent accounting, tax, legal, or financial advice from a certified public accountant, attorney, or other business advisors. You should not act upon any of the information in this article without first seeking qualified professional guidance from your business advisors on your specific circumstances. The information presented should not be construed as advice or guidance from BFBA.