How Boards Can Prepare For The Inevitable Economic Dip

economic downturn
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How can boards prepare for an inevitable economic downturn? The first step is to know your space and remember the past.

economic downturn

I’m being asked more frequently this year than last…‘when do you think the economy will cool down and do you have any suggestions as to how to prepare for that?’  Tempting, but, I don’t presume to answer the first question; folks far more qualified than I debate that every day.

I do try to answer the second one though, drawing on my 35+ years’ experience working with well over 100 enterprises ranging in revenues anywhere from $4 million to hundreds of millions and covering the full gamut of manufacturing, distribution and service.  Here’s what I counsel.

• Know your ‘space.’ Does history show your industry or profession to be a leading or a lagging indicator and what trends are being reported through associations, industry data and broader economic studies?  Retrace the trend lines pre the ‘Great Recession’ and factor in your experiences post 9/11 as well.  Read the road signs, discuss with others who know your ‘space’ and then make your best informed judgment about what the next several years will bring.

 Still Optimistic? – Pass ‘Go’ and stay the course!

• Concerned – Begin to adjust your strategy so that post any downturn your rebound will be opportunistic.

    ◦ Modify your capital investment strategy to emphasize projects and programs that have a high short- term return.  The payoff will come just when you need it…during the down cycle.

    ◦ Accommodate 10 to 15% of demand with ‘contractible’ resources, e.g. working overtime instead of hiring, putting on temporary or contract employees, outsourcing, and renting space in lieu of new brick and mortar.  When the downturn comes you’ll be able to reverse scale by at least the same amount without impairing your core capabilities.

   ◦ If your business depends on inventory, be ready to reduce it as revenues slip with the goal of maintaining the same number of turns (or more) in a downturn as you maintain today.  Working capital tied up in slow moving inventory is painful—it’s cash that could be used for another purpose and, it leads to obsolescence at the worst possible time.

   ◦ Shore up your lending arrangements, your line of credit, interest rates and length/term of loans.  It’s always better to so from a position of strength (performance).

   ◦ Lock in and protect your customer/client base.  My experience is that customers try hard to be loyal to their supply base in downturns but hungry competitors try just as hard to make those customers their own.

   ◦ Don’t be fooled by a positive cash flow.  As a business contracts, accounts receivable from past higher revenue months’ flow in through the collection process, but are not replaced in kind by new revenues/billings.  If it seems like you’re flush with cash – save it, there will be rainy days.

   ◦ Especially if you’ve been fair and timely in paying your supply base, negotiate extended terms before they are actually needed and then set the precedent of meeting those terms from the onset.

When a downturn reverses, it is not unusual that demand exceeds supply either in terms of capacity or ability to deliver goods or services on a timely basis.  Why?  Inevitably at least a few of those who didn’t plan as well as you either fell by the wayside or are now capital constrained, incapable of funding their growth.  Be the opportunist; remember the past…plan for the future; lessons learned!

Read more: When A Merger Isn’t The Best Idea

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