Savvy company leaders plan for the low points and implement strategies that ensure their businesses will thrive in the long term — no matter what the economy does.
August 28, 2018 6 min read
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While the threat of another economic recession seems to constantly loom on the horizon, U.S. CEOs aren’t afraid. A report from PricewaterhouseCoopers indicates that 52 percent of business leaders polled are as confident about their revenue growth prospects in 2018 as they have been at any point since the Great Recession.
In many ways, however, our rosy economic situation is a trap. Economic projections in the United States are so positive that CEOs face a danger of succumbing to complacency. The GDP, unemployment rate and inflation rates are all trending in positive directions, which can cause widespread amnesia about how difficult things can actually get when the economy tanks.
It’s also easy to forget that recessions come around fairly regularly. The New York Times has reported that they hit every five years, on average, with a grand total of 33 recessions in our country since 1854. Some signs — irrational stock-market exuberance, for one thing — signal the peak of a business cycle. This means a downturn is not far away.
That’s why, according to an economic outlook from finance website The Balance, a recession is likely to make its unwelcome appearance in the next two or three years.
When a recession — or any other number of challenges — arises, it’s hardly fun and games to be at the helm of the ship. So, when these issues inevitably rear their ugly heads, entrepreneurs must be able to roll with the punches.
The value of cautious optimism
I work in the insurance industry, and customer retention is one of our biggest challenges. That problem is amplified during a recession. We might sink resources into obtaining a new client, but that client will naturally begin to explore other options if a financial bottleneck comes up due to economic woes.
While it’s great to celebrate new customers, it’s even more important to overcome any challenges inherent to your business model — retention, in our case — during a recession. By getting ahead of any problems, your company stands a far better chance of weathering the storm until the economy recovers.
What matters most as a CEO is how you measure and manage your operating costs and cash flow. Here are three ways to ensure your company is positioned to succeed regardless of the economy:
Related: Prepare for a Massive Recession
1. Don’t be afraid of accounting losses
Losses according to formal accounting rules do not necessarily equate to bad news. Your company might still be generating revenue, particularly if you’re in charge of a young manufacturing company or an established real estate development business. Buildings such as hotels and warehouses are built on borrowed money, which depreciates over time. But those loans eventually go away, and positive cash flows quickly turn to profits.
No one argued that Tesla was in trouble when it spent $5 billion to build its gigafactory to churn out batteries, but CNBC reported that that investment caused huge losses when the facility didn’t open until the second half of the year. The key to this type of long-term strategy is finding investors who are comfortable with the logic behind your losses.
2. Don’t run your business like a charity.
Maintaining positive relationships with clients requires a certain level of flexibility, but you can’t afford to allow too many customers to take more than the standard 30 days to pay for your products or services. Extending already-lengthy payment terms can cause a dangerous cash flow squeeze on your end.
It’s possible to make a profit on paper but still go out of business if you don’t have the steady income necessary to cover your own expenses. Some clients skip getting a loan from a bank and instead plan around delayed or extended payment terms to finance their own cash flow. You effectively run your business like a bank when you do this, which is just as bad as acting like a charity.
According to WePay, 16 percent of businesses have suffered from payment fraud in the past year alone; as many as 8 percent of businesses have experienced at least 10 such instances. Thankfully, it’s possible to protect your company against these hazards while still preserving customer relationships.
Consider conducting an audit designed to minimize or even eliminate long payment terms. Better yet, ask customers about their payment policies at the start of a contract and negotiate terms that work for both parties.
For clients that habitually submit late payments, send reminders of approaching due dates and be swift to follow up after missed deadlines. If friendly reminders don’t work, you might have to ask for deposits or full payments ahead of time.
3. Explore different supplier options.
Even when you’re raking in plenty of revenue, there will be times when you still struggle to keep your head above water. If you cannot increase your bottom line, you might need to cut supplier costs.
Remember that prices are not necessarily set in stone. Many vendors are willing to negotiate lower prices — particularly if you have developed good relationships with reliable sales reps. Having a consistent contact person creates opportunities for those sales reps to adjust your order details and get you the best possible deals.
If you are uncomfortable or inexperienced with negotiations, it’s perfectly fine to partner with a consultant or service provider that can hold your hand a little while you learn. These services can save you as much as 7 percent on orders, according to Small Business Trends.
Additionally, trade credit can be a great way to retain cash in your business. Trade credit means you don’t actually pay for goods until after you have sold them. Just make sure your vendors are the first ones you pay once you have the necessary resources.
Any company that stands the test of time will undoubtedly face plenty of fiscal ups and downs over the years. Savvy CEOs plan for the low points and implement strategies that ensure their businesses will thrive in the long term — no matter what the economy does.