There’s a good news/bad news situation currently brewing with the economy. We are doing fairly well given it’s an election year, and the fact that a lot of uncertainty is hanging over our heads. There are very few red flags in the economic data at the moment, and I would say that my recession forecast is being backed up somewhat to possibly 2019. First we need to see the reactions to November’s events.
As I’ve said before, the economy is moving at a plow-horse pace due in part to demographics. There are approximately 10,000 baby boomers retiring each day, and it was that generation that built our industry – they’re the ones that put in the landscapes. Now that generation X is taking over, there are 11 million fewer in that generation. But the good news is that the millennials, the future green industry customer and now the largest generation, is the most eco-conscious group to come along.
Structural changes are still occurring in the industry. We lost a couple of big players this year, and we may lose a couple more in the coming year, but that is mostly due to being over-leveraged. The consolidation trend is continuing but at some point, de-consolidation will begin its cyclical reversal. An industry only consolidates to a point and then reverses trend. Many factors play into this, but loss of control is one of the biggest reasons. Therefore, be prepared for the next economic downturn and manage your working capital effectively.
You can avoid being over-leveraged if you regularly analyze financial metrics regarding specific key areas of your business. Ask some red-flag questions to determine if your business might face trouble in the future.
- Are you having difficulty meeting your bills in a timely manner, indicating cash flow problems?
- Are you experiencing a shrinking market for your product?
- Are you frequently losing customer sales?
- Is there an increase in customer complaints, revealing that your business is failing to meet their needs?
- Do you find that inventory levels are climbing faster than sales, and you are building up more inventory than sales warrant?
- Is your company highly leveraged and thinly capitalized? Does your bank have more at stake in your business than you do?
- Do you have essentially a one-person management team? Is your company overly dependent upon any one person?
- Is your business suffering from poor management communications? Are decisions not being disseminated down from the top?
- Are you making decisions based on poor managerial information (e.g., inadequate information on sales levels, growth and aging of accounts receivables, inventory levels and turns, etc.)?
- Is your company very late in producing financial statements? This is a sure sign of poor financial planning.
- Are you experiencing sales growth but no growth in net income?
- Do you have a tight grip on expenditures, or is your company committing to expenditures before cash is in hand?
These questions are not listed in order of importance, but if you answered yes to any of these questions, then your business should conduct an immediate assessment to determine the underlying causes.
Consider these steps to help protect you from financial weakness. Keep in mind that some of these depend on the market conditions in your region.
- Conserve your cash. Don’t spend a dime on anything that isn’t absolutely necessary to the strategic vision of your operation. Examine every personal expense you have to find alternatives to any spending patterns.
- Refinance anything and everything you can. Stretch out the payments because getting cash later will be difficult as more people will apply for loans and banks become very picky.
- Work out a worst-case scenario cash flow projection that assumes a decrease in sales. As part of this, determine what expenses will be unavoidable. Look through your cash disbursements. Pre-plan a less expensive alternative to as many expense categories as possible.
- Know your costs well because poor pricing can put you out of business faster. Assume that cost-side pressures caused by a recession will last about two years after a recession is over.
- Beef up your advertising/marketing. So many businesses cut back in advance of or during an economic slowdown. Now is the time to gain “mind share.”
- Slowdowns mean layoffs. Therefore, new hires become available and are sometimes available at a lower rate of pay than your current rate. Take advantage of that.
- Convert anything you don’t need into cash well ahead of any signals that your area will be hard hit. Selling off assets during a recession is difficult. Nevertheless, selling off unused equipment reduces insurance, registration costs, and property taxes.
- Apply for credit long before you need it. You may have to “borrow” your future, and banks will raise interest rates on high-risk loans as conditions worsen. Look deeper in your own markets. Can you offer your current customer base a more diversified line of products and/or services?
- Review your business insurance. Make sure your premiums have been adjusted for the depreciated value of your vehicles and equipment.
- Look at your estimated tax payments made to the IRS. Decreased earnings call for decreased estimated tax payments.
Companies with short-term liquidity problems can reduce inventories and optimize receivables and payables to free up cash quickly; businesses with strong balance sheets but decreasing demand for their products can reduce inventories to offset falling sales so that working-capital ratios don’t worsen; and companies whose performance remains strong can use working-capital strategies to solidify their financial position and attack competitors weakened by the crisis.
An excellent exercise is to run a cash flow working-capital projection using 60 days, 90 days, 120 days, and even up to 6 months to be paid from some of your customers. How much cash do you need to survive? It’s imperative to find the answer to that question. Working capital is an important source of cash throughout the business cycle, but it is especially critical during a downturn.
Companies that manage their working capital effectively can generate cash, streamline their operations, and improve their cost position. When the economy is expanding, the impact of reduced working capital can be the critical difference between success and failure in a takeover bid or between funding a strategic project with cash on hand and funding it through a debt offering.
The payoff for effective working-capital management can be even greater during an economic contraction, when reduced access to external funding and sharp decreases in sales can greatly limit available cash.