Looking ahead: Ten tips to prepare for a downturn.

Businessman looking through telescope standing on floating dollar sign looking for success

Looking ahead: Ten tips to prepare for a downturn.

By Anne Van Delst, CPA, CA, LPA

Recessions, and even lesser economic downturns, can – and do – ruin once-thriving businesses overnight.

While it’s true that economic hills and valleys are beyond the control of small and medium sized business owners, those overnight crashes are often the result of months or years of inadequate planning.

So, my message to business owners is this: Why not do all you can to position your business for long term success in any economic environment?

This means looking to the future, being aware of trends in whatever business you’re in and, at a bare minimum, ensuring that there is always enough money in the bank to meet those regular obligatory payments – from paying employees to paying the government its HST, and payroll remittances.

Here are ten tips and reminders that might be helpful, and should be especially useful to those entrepreneurs with new and growing businesses:

  1. Put your business through regular stress tests. This means looking at your working capital – accounts receivable and current assets, minus current payables – and making sure have the money to pay your bills. Aside from government and payroll, these obligations include repayment of loans and other trade payables.
  2. I’m repeating myself because it’s important: Remember that money has to be set aside for HST and payroll remittances. These balances are considered trust money and belong to the government, not the business. Make sure that you can meet these obligations. If the business can’t pay the money, or if the business goes into receivership, the government may come after the directors’ own money if obligations can’t be met.
  3. Most businesses will experience temporary cash challenges. If a customer doesn’t pay for whatever reason, do you have enough cash to meet the payroll anyway? For some, the differences between expecting to be paid in 60 days and not getting paid for 90 days, can present significant difficulties. Don’t be dependent on that one payment. Make sure you have contingent funding like a line of credit in place if needed for this situation. It’s easier to get one before you hit financial difficulty and there is no cost to having one.
  4. If you are working on a contract-to-contract basis and have no significant new work on the horizon, consider making changes to your operations. Revisit your spending. Are there discretionary items you can delay buying? There are also fixed costs to account for – regular office overheads, for example. If you can’t pay those, you’re going to be in trouble. These are costs that are important to keep the business operating even if they often themselves do not generate sales.
  5. If you’re getting contracts by bidding less than you normally would, what impact is that going to have on your business? While it is important to cover the cost of keeping key employees in a slower economy, you do not want to do this for long. Look at the costs associated with your sales to identify possible savings. An extended period of spending more money than you’re bringing in will put the company into financial difficulty.
  6. Economic slowdowns are preceded by signals, notably slowdowns in sales. If you’re a business owner – you need to have a solid understanding of what’s taking place in your own business and your industry in general. Are your competitors also having cash flow problems? Look for trends, make adjustments when necessary and plan ahead.
  7. Ensure that you maintain positive relationships with your customers and your suppliers. Working with them can help you to manage your cash flow. Consider offering incentives or discounts for early payment to clients and customers.
  8. Don’t rely just on annual financial statements to run your business. They are based on the past and you need to be looking ahead. Find business advisors who will give you sound, holistic business advice and don’t just rely on past performance to assess the future. As we say at GGFL: ‘See the opportunity behind your numbers.’
  9. Don’t be swayed by sentiment. If it doesn’t make sense to keep putting money into your troubled business, don’t. Be realistic. If you put the money in, will it turn the company around?
  10. And this sums it all up: Be proactive and not reactive. Stay ahead of the game and you’re more likely to emerge a winner.

Over the next months, we will be covering specific strategies you can put in place to offset the impact of a slowdown, including:

  • Approaches for improving your accounts receivables
  • Working with clients and suppliers to improve cash flow
  • Reviewing fixed costs and assessing where to make cuts
  • Examining the cost of goods sold to identify potential areas to save • Reviewing your key financial ratios and maintaining productive relationships with your lenders
  • Seeking out alternative sources of financing

Join us for a Live Webinar

We will be discussing strategies to offset the impact of a slowdown and conducting a stress test simulation during a live webinar on Tuesday, November 19th. For full details and to register, please click here.

Anne Van Delst is a GGFL partner.