Business Management Articles
The R Plan: Recession-proof Your Business
Mississauga Business Times
Bob McMahon
With the dreaded “R” word increasingly being used to describe the US economy – and with our own economy being so closely connected, this is a good opportunity for all Canadian business owners to “anticipate the best, but prepare for the worst.”
While Canada may or may not follow the US into recession, the following eight-step plan can help to strengthen your business in a slowing economy.
1. Prepare cash flow projections
Cash flow is the key to survival in a sluggish economy. To enable your business to weather slow cash periods, prepare cash flow projections for the next two years. Include not only a typical scenario, but also a “worst case” so you can prepare an appropriate response.
2. Build cash reserves
Having a cash reserve could save your business in the event that sales nosedive or customers can’t pay. To build this reserve, deposit a certain amount of funds every month into a savings account or low-risk investment.
3. Reduce debt
Banks are already beginning to tighten their lending criteria. Meet with your existing lenders to solidify or increase credit lines and negotiate the best possible terms for loans and leases.
4. Secure backup financing
Having backup funds available can also reduce the risk that your business could run out of cash. Investigate new sources of funding: financial institutions, leasing companies, factors, private investors or others. Be sure that commitments are documented and stay in touch with both current and backup lenders so you can access funds quickly if necessary.
5. Reduce discretionary spending
Keep a lid on expenses; avoid any new expenditures that don’t provide an immediate benefit to your business. Be especially cautious about taking on expenses requiring a long-term commitment. It’s good practice to review expenses every quarter and determine where you can eliminate those that don’t directly add value to your operation.
6. Strengthen your customer base
Review your customer base for vulnerability to an economic slowdown. Can you solidify contracts with key customers? Diversify revenue sources by expanding into new niches? Or secure a more diverse mix of customers?
7. Explore hiring options
For most small and mid-size businesses, employees are the biggest expense. While you don’t want to limit the growth of your business, should you need additional people power, consider temporary alternatives to full-time employment such as consultants, outsourcing, or part-time or temporary workers.
8. Closely monitor your company’s financial health
When the economy catches a cold, it’s contagious and every business owner needs to be vigilant about the health of your enterprise. On a monthly basis, monitor the following financial statements: cash flow statement to track the inflow and outflow of cash; income statement to review sales, gross profits, expenses and net profit/losses; balance sheet to assess changes in liabilities and net worth.
Be on the lookout for slowing inventory turnover or accounts receivable or a rapid rise in the debt-to-equity ratio. These could indicate declining financial health for which you may need to take immediate corrective action. If problems continue to intensify, don’t delay -- consult with a restructuring professional who can assess the situation and offer objective advice and solutions.
Slow economies are an unfortunate, but natural, part of the business cycle. With this eight-step action plan, however, you can focus less on a weakening economy and more on strengthening your business.
Bob McMahon is a partner of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed. If you have questions about this article or you would like to receive BDO’s Tax Factor newsletter, contact Bob in the Mississauga office at (905) 270-7700 or bmcmahon@bdo.ca.
This article was originally published in Mississauga Business Times, Sep 2008.
