Taking Steps For Recession Readiness

As of this writing, most economists are indicating that a recession is coming, but no one knows how bad it may be and how long it may last.

I once met the captain of one of the largest crude oil tankers in the world. He told me these ships are so massive that at full speed their forward momentum would put them on a collision course with another tanker before it was visible over the horizon. You could throw the wheel all the way to starboard, put the engines in full reverse and it would still be too late to avoid a crash.

“That’s why,” the captain said, “you need good instrumentation.”

Unfortunately, some businesses are reacting to a looming recession the same way. They are headed for disaster and they aren’t taking evasive maneuvers in time. They lack the visibility and the flexibility to respond quickly.

Here are some important things you can do and questions you can ask yourself to survive a recession:

A Question Of Visibility

You must get greater visibility for your business so you can react in time and make the right moves. What does this mean? Are you staying in touch with your customers? Are they struggling? Are their needs changing? Do you know who your most profitable customers are?

Is the mix of products and services sold changing? Are you offering the right products or services? What are your individual margins on the products and services they are consuming?

Do you have accurate, timely and relevant visibility into your true costs? How do your costs change with changes in sales? Is it time to attack wasteful spending? Do you need to shift your costs to a more variable structure? If you need to cut, do you know what to cut and when?

Do you have the capability to put it all together and see how all these variables interact? If revenues decline by 25%, what will happen to your cost structure? Your cash flow? Your balance sheet? What will you do in response?

Be Prepared For Reality

Stunningly, even businesses that eventually figure out the right moves will still die because they failed to act until it was too late.

Is a major cost reduction required? Unfortunately this usually means people have to lose their jobs. I’ve seen business owners refuse to lay off one employee until eventually the entire business fails and all of the employees end up losing their jobs.

Business owners must understand that the business must stay healthy for the good of the whole. Do you do regular employee performance reviews and know the people you need to keep and the ones who need to go? Is a new compensation system needed? What are the revenue impacts? Does a reduction create a bottleneck?

Take time to review the operational theory of constraints and look for a balanced capacity across all areas of the business.

Know Your Balance Sheet

Do you need to raise cash by whittling down your inventory or focusing on collecting receivables? Do you have an appropriate mix of debt and equity? Do you have the right assets and the right financial flexibility?

With a strong balance sheet you can look for opportunity. You may be able to pick up additional equipment or acquire a competitor at an attractive price and be in position to reach new heights after the storm passes. The time to start preparing is now.

Allen Engstrom is Managing Partner of CFO Network, a provider of outsourced accounting and financial consulting services to businesses locally and nationwide. He can be contacted at aengstrom@cfonet.biz.