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Five Questions for Businesses Owners Ahead of an Economic Downturn

Aug 29, 2022

If the pandemic taught us anything, during times of economic downturn, it’s critical for businesses to protect cash flow and have capital on hand. As we enter Q4 of 2022, these concepts are top of mind as business owners meet new uncertainties about the nation’s economy, our already-fractured supply chain, and the looming threat of a recession.

Whether it is maintaining a gross margin, investing in your employees’ growth, or reassessing vendor partnerships, focusing on your business’s fundamentals is always essential—especially during an economic downturn.

Here are five questions business owners should ask themselves when assessing their business strategy to protect cash flow, prepare for uncertain times, and even set the stage for growth.

Who Should I Be Talking To?

Every business is unique, so it’s important to first look in the mirror and ask yourself what you can do to best strengthen investments and protect margins. For many, this would be the first time in their working lives they’ve experienced a recession. As such, it’s important to share ideas with and talk to your business partners, employees and customers about how to best prepare.

First, pay attention to your own team. They’re your most important asset. Effective communication about their pain points and taking action to alleviate them can go a long way. Stress levels might already be at record levels, so it’s more important to be a leader, assess the situation and make the right call.

Next, talk to your customers about their needs. Like you, they have unique needs and stressors brought on by economic downtimes. How can your products or services provide them with solutions to pain points? If you do need to increase prices to protect margins and cash flow, communicating this with customers is an essential part of maintaining relationships based on value and trust.

How Do I Start a Cash Flow Analysis?

Following your business’s cash flow is a critical metric to track financial well-being—during good times or bad. Rarely does anybody argue with the adage “cash is king.” Now is a great opportunity to reassess your most recent cash flow analysis and find a true indicator of where to either cut back or invest.

Start by preparing a 13-week, detailed rolling cash flow forecast by receipts and expenditure line item. If that seems a bit daunting, even starting with one month can help you gain a better understanding of your operation.

Consider reporting on items that varied by more than 10%. This will help you identify where the money goes and whether you are receiving optimal value for your spending.

Should I Consider Commerical Lending?

Whether it’s because cash is tight or you recognize an area of investment, a commercial loan is a valued financing tool. So, when is the best time to inquire about a new loan or an increase in your line of credit? The answer is preferably before you need the money. By applying for a loan sooner than later, the worst thing that can happen is your lender says no. If this happens, it might suggest two things. First, you're no worse off than you were before. Second, it might be an indication to look for a new lending partner.

There are a vast number of commercial lending options available in the market today including community banks, large intuitions, non-regulated lenders, even new digital financial platforms that offer fast lending. This allows you to shop around for the best rate or terms for your business’s unique needs and situation.

Where Can I Refine my Products or Processes?

Early in my career, I had a mentor give me some advice that I share with clients to this day. “It’s easy to bring someone a problem. Don’t simply bring someone a problem, bring them a solution. It shows that you thought about the answer.”

In tough times, it’s easy to simply identify problems. But with focus and accountability, you can go a step further and refine your processes and controls to implement real solutions that protect cash flow and increase margins.

In times of uncertainty, it’s important to focus on what initially made you successful. A great place to start is the 80/20 rule. The business concept, also known as the Pareto Principle, essentially states that 80% of your outputs are a result of 20% of your inputs.

Consider this from a customer standpoint. If 20% of your customers account for 80% of revenue, those are the clients in whom you need to invest additional attention. They are the clients you should be targeting for growth. Where else can you apply this rule?

  • Employees – Who are my top producers within the business? How do we incentivize, reward and retain given the current employment market?
  • Products – Is one product or service offering producing more value than others? How can you invest in that and possibly cut back on others?
  • Internal Expenses – From my cash flow analysis, what are the few areas with the highest costs? Are they providing the value you’re paying for?

How Much Should I Have in My Reserves?

While maintaining and protecting cash flow and bottom-line operating profits are crucial both to business success and survival, so is saving. While we cannot control the ebbs and flows of the economy, business owners have the power to strategically create and contribute to an emergency fund.

Just how much is a safe amount to have saved up in reserves or in conservative money markets? It really depends on the unique needs and nature of your operation and its monthly expenses. A good place to start is typically to have a year’s worth of business expenses on hand.

While a robust cash reserve may not happen overnight, the process of achieving it must start at some point. You may never need to dip into the fund, but the sooner you get started with having a line item contributing to it, the better.

The Bottom Line

At the end of the day, especially during economic downtimes, understanding your business and cash flow is key to success. As business leaders, it’s important to ask yourselves the aforementioned questions, among others, to stay agile and proactive—no matter the economy. Because when the game is on the line, winners always want the ball to take the shot, regardless of if they make it. That’s how we grow and find success as both individuals and leaders.

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Robert D. Katz

Robert Katz CPA is a Managing Director of EisnerAmper Financial Advisory Services Group, and works with public and private companies, in and out of bankruptcy, to create and execute the strategy needed to restructure or improve operating performance.

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