It may seem like wishful thinking, but business owners and executives need to start planning how they’ll handle increasing revenue to avoid problems when the economy rebounds.
“Economic times have been very difficult over the past 24 months, but there is a light at the end of the tunnel,” says Nicholas Browning, the president and CEO of FirstMerit Bank’s Akron region.
The economy will eventually rebound, and when it does, will your company have the necessary working capital and internal cash flow to grow again?
Smart Business spoke to Browning about how to ensure your company is ready to take advantage when the economic upturn hits.
How can you survive today while positioning yourself for when the economy turns around?
Many companies, although historically healthy, have experienced extreme sales declines and many other challenges to their businesses over the past year. To survive in this new challenging environment, these companies have reacted by using a three-step approach.
The first step is aggressively reducing expenses. The second is focusing on the collection of accounts receivable. The third step is stretching their vendors and/or extending payables.
All of these actions have the ability to create an immediate positive effect on cash flow. However, none of these strategies can be implemented forever or provide long-term success for a business. In my experience, companies have an amazing ability to cut costs in order to survive in the short term.
What pitfalls should companies be aware of as the economy begins to turn around?
What many owners do not realize is that companies weakened by the recession have a high risk of failure when the economy rebounds and their sales start increasing again. Revenues that increase quickly require cash to fund receivable and inventory increases. Businesses that carry substantial inventory, such as manufacturers and distributors, will be affected the most dramatically, but all companies that are growing will use cash. It is the responsibility of the business owner and his or her financial team to assess the company’s cash needs for the upcoming year. Your banker can help with this.
What needs to be done to assess a business’s upcoming cash needs?
There are five key items that a business needs to examine:
- Collection time period for receivables
- Collectability of those receivables
- Payment terms for suppliers
- Actual expenses paid
- Access to additional capital or line of credit to cover any potential cash shortfalls
These factors will determine if your company will have the access to liquidity it needs to fund additional revenues, which will become necessary when the economy rebounds.