Prepare Your Business For The Fiscal Cliff
As Congress embarks on a five-week recess, the amount of discussion around the so-called “fiscal cliff” and its potential impacts on the economy continues to grow. I’m referring, of course, to the looming expiration of the Bush tax cuts and triggering of mandatory expense reductions, all of which will take place early next year if Congress does not act before then. And considering that nothing significant is likely to happen before election day in November, the time frame for action, and the margin for error, diminish with each passing day. One thing is almost certain: if Congress fails to act, or if their actions are perceived as too little, too late, the economy will fall into another recession.
Like all of you, I sincerely hope that Congress, and the President, can put their ideologies aside long enough to find a reasonable solution to these issues. But given their recent track record, it’s only prudent for businesses and their owners to prepare for an increasingly challenging economy. For those of you who have blocked out the bad memories of 2008, here’s a refresher to keep your business finance house in order.
Firm Up the Balance Sheet
- Conserve cash – a larger cash cushion is essential to maintain liquidity and flexibility if there is a downturn.
- Watch inventory levels – this can be one of the largest uses of your own working capital, so keep a close eye on turnover and watch for slow-moving items.
- Manage A/R aggressively – if you don’t have policies and procedures in place to keep customers paying on time, now is the time to implement them.
- Tighten up your credit policies – the banks do this in a tough economy, and you should too.
Manage Cash Flows
- Maintain liquidity – forecast your cash needs and expected inflows; employ worst-case scenarios to ensure coverage.
- Consider sales cycle – lead times and close rates will be more challenging and may impact cash inflows.
- Have a strong cash control environment – unfortunately, financial fraud can be more of an issue during rough economic times.
Prune Your Cost Structure
- Products and product lines – now is the time to review profitability and focus resources on those products that provide the highest return or cash flow.
- Consider temporary help or outsourcing – build flexibility into your work force and your cost structure using alternatives to full-time employees.
- Review discretionary expenses – focus resources on those activities that generate profitable revenues.
If You Invest, Invest Wisely
- Model conservatively – be prudent about cash flow projections and consider higher-tax scenarios going forward.
- Evaluate financing sources – banks or investors may stay on the sidelines if things get rough.
- Don’t overpay – asset values may become more attractive (again) as weaker companies struggle for survival.
Of course, this may all be doom-and-gloom stuff if the government gets its act together, Europe makes a miraculous recovery, Middle-East tensions don’t escalate and China’s economy continues to hum. (Did I mention oil prices?) In the meantime, consider the business finance issues above and take those steps you deem appropriate. And remember, it’s not just about surviving a recession, it’s also about being in a strong position when the economy starts to take off. Companies that are best positioned for an economic upturn, with strong balance sheets, a healthy cost structure and a keen eye for value, are most likely to build value over the long term.