Who knows when the next recession will hit, how deep it will be, or how long it will last – but we know its coming. Will your business be positioned to thrive or dive in the next recession? Here are four things to consider from Epiphany Professional Development Business Coaching as you evaluate your business health and preparedness.
During times of expansion, inventories often swell to meet the anticipated demand. Buying additional inventory may secure better discounts and allow accelerated delivery to provide competitive advantages. But during times of contraction (i.e. recession) cash tied up in inventory may limit your ability to meet operating obligations.
See what can be done to reduce inventory costs without sacrificing the quality of goods or inconveniencing customers. Assess inventory turnover by reviewing AR turnover or inventory turnover rates and trim levels according to frequency of turn or competitive position.
You can use the following to view how well you turn inventory into accounts receivables.
Accounts Receivable Turnover Ratio = Net Annual Credit Sales ÷ ((Beginning Accounts Receivable + Ending Accounts Receivable) ÷ 2)
Evaluate sourcing, inventory levels, turnover, etc. to minimize tied up capital. Just because you've always done things in a particular way doesn't mean you have to keep doing them that way - especially when other ways may save you money.
Manage Cash Flow - Revenue is vanity, Profit is sanity, Cash is reality.
Cash is King. Cash flow will determine the success or failure of your business during times of contraction or rapid expansion. Make certain that you understand your cash flow characteristics and don’t be distracted by the glamour of revenue and paper profitability. To help in this regard consider conducting a couple of quick liquidity checks to determine how well you are positioned to meet your short-term debt obligations
Financial ratio’s will help you determine how liquid your firm is or how successful it will be in meeting its short-term debt obligations.