“Don’t pull the covers over your head,” Kurt Kofford told business owners during a Recession Readiness Assessment seminar at BiggsKofford PC.
Being realistic about what’s happening in the current marketplace is an important element of business preparedness.
“For some business owners, it will be a matter of surviving,” Kofford said. “But for others it will be about thriving.”
Certain businesses have “taken a market share and a market position that they couldn’t have during boom times — and they’ve absolutely capitalized on it during this downturn,” he said.
Business owners need to do a “gut level” assessment of their overall business strategy and get “back to basics.”
Questions management teams should ask themselves include “What do we compete on?” “What is our core competency?” “What got our business to this point?” and “What are the long-term trends in our industry?”
“This is a wake-up call,” Kofford said. During down times, businesses don’t have the time, resources or financing to get sidetracked as they do during the good times.
“This is the time to be morphing or adapting to the realities of our situation,” he said, “and the possibility that we may be in it for a long time.”
Kofford recommends that business owners hold an off-site planning session to address such issues, and use the old-fashioned but still useful SWOT acronym to assess a company’s (internal) strengths and weaknesses and (external) opportunities and threats.
Re-visit your mission and vision statements and eliminate product lines or even customers that do not support your long-term goals.
“Play out the what-if scenario,” he said. “What will be the end result of (such and such) if we don’t address it?”
After completing an in-depth assessment of the business, owners should implement a strategy that “determines your customer value proposition, creates financial/operational plans, creates key performance indicators, and creates an efficient process at all levels of the organization.”
KPIs are “your management tool,” said Chris Blees, chief executive officer.
“If you are only looking at your financials once a month,” Blees said, “you are not managing your business using your key performance indicators.”
In fact, depending on the type of business, KPIs should be looked at daily or weekly.
Next, said manager Austin Buckett, executives and business owners should complete a cash-flow assessment, which includes working capital — how many days it takes to convert profits into cash, and what current average holding periods are for accounts receivable and inventory — debt and capital expenses.
Look at what your debt obligations are for the next two years, your debt coverage ratio and whether you are at risk for having your debt renegotiated on short notice, Buckett said.
Ways to improve cash flow can include improved collections policies, such as offering discounts on bad credit (70 cents on the dollar is better than zero), demanding retainers or payment with service, improved inventory management (that’s CPA speak for “get rid of products that don’t sell”), offering early discounts to vendors or customers, or plain old liquidation sales.
“If you have stuff sitting around that’s just eating up cash on the balance sheet,” Buckett said, “what can you do to get rid of it?”
And, above all, be aware of your loan covenants, and whether a balloon payment is on the horizon, etc. If it’s time to have a chat with your banker to renegotiate debt — do your homework first.
Create a “dynamic cash flow model” to show what’s happening with your business, such as profit and loss, debt, working capital, etc. and when, for instance, cash flow will become negative if you don’t have a term payment at a set interest rate, rather than a balloon payment, he said.
During economic downturns, it is especially important to be prepared with a financial model before attempting renegotiations with a financial institution.
Revenue is the next item to assess, which includes evaluating your customers, products, markets, pricing and marketing. Who are your most profitable customers?
“Are these relationships financially beneficial to your business?” Buckett asked. “Emotionally, it’s hard to cut customers out — especially if you’ve tried to court them for years. But, financially, it makes sense — if they don’t generate profit — to drop them out of the system.”
Another important aspect to revenue assessment is an analysis of your “breakeven level” by price and by volume.
It depends on the type of business, Buckett said, “but, typically, lower volume equals lower costs.”
And, even during an economic slump, certain businesses can lower volume, raise prices and increase revenue.
Other businesses will have to lower prices to survive these times, but it’s critical to know your minimum price point.
“Don’t get sucked into new contracts that are unprofitable,” he said. “Determine your minimum price point.”
Beyond that, Buckett said, “don’t get into a price war — get out!”
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.