Seven Ways to Prepare for an Economic Slowdown
From the Puget Sound Business Journal
Small-business owners can take comfort in how the Puget Sound economy keeps humming along. Employment for non farm jobs in King County grew 3.4% in the fourth quarter, over the same period in 2017, according to the county’s Office of Economic and Financial Analysis. Retails sales rose 6.3%. Permits for single family houses were up 9.8%. That’s good news for all businesses, which rely on the economy’s multiplier effect.
Yet this is exactly the time business owners should be shoring up balance sheets and closely examining cash flow in preparation for an unexpected downturn. After all, the bull market is a record 10 years old, and volatility is back. Companies that practice fiscally conservative measures now will fare much better down the road than those that don’t. Consider these seven ways to help safeguard your company from tough times:
1. Build reserves. It’s a basic piece of advice, but owners often don’t set aside enough cash during the good times. You need to be consistent in building reserves for your company, when cash flow is strong.
2. Open a line of credit. Business lines of credit are great for covering gaps in funding needs, taking advantage of buying opportunities, and using as a resource during slow economic times. Line limits are based on revenue, so it’s always a good idea to establish your line needs when times are good rather than during a down cycle, when clients have pared back orders and sales.
3. Reduce floating-rate exposure. While credit lines are good to have, often small businesses use them to finance capital purchases due to the immediate availability of funds. That’s fine, but refinance those balances with term loans. The interest rates on lines of credit are variable and adjust with the market. Shifting to fixed rate term loans reduces overall interest rate exposure and eases your cash flow during challenging economic times.
4. Pay down debt. Now is a good time to reduce obligations. If cash flow is strong use it to pay down principal. Think about potential investment: do you really need that piece of equipment if a slowdown were imminent?
5. Cut expenses. Take a hard look at your costs and cut back where appropriate. Employee
costs are a big-ticket item, so make sure and take good care of your top performers and evaluate any under performers not adding value. Lead by example as the owner and pare back your own salary and
distributions to show employees you’ve got skin in the game as well.
6. Diversify your receivables. If you only have a few clients and one goes under, you’ll face a serious reduction in cash flow. Work to get new customers by concentrating on your core business – and
doing it really well – rather than expanding into new lines of product.
7. Develop a succession plan. If you plan to sell your company in the next five years, think about doing it sooner than later, while things are still good. One way is to sell to an insider. Banks can lend money to a partner, so he or she can buy you out, but generally institutions require two years of some form of ownership in the business. So bring an employee into the ownership structure now.
While these are all basic business principles, they’re harder to put into practice because they all take
time and effort. But following them will help set you apart from the competition. In the process, make
sure your banker understands your needs as well, and use your banker as a key resource to help prepare for tougher times.