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.
The current ratio and quick ratio are two of the most commonly used ratios when determining liquidity. The current ratio will help you determine the ratio of your current assets to your current liabilities. Current assets include cash, accounts receivable, and inventory while current liabilities are bills you owe generally within 90 days.
Current Ratio = Current Assets ÷ Current Liabilities
The quick ratio will allow you to determine if you can pay your short-term debt obligations, or current liabilities, without having to sell any inventory.
Quick Ratio = (Cash + Marketable + Securities + Accounts Receivable) ÷ Current Liabilities
It can be difficult evaluating the many opportunities that exist for a small business. Adding products, services, new markets, etc. may be tempting; yet, during times of contraction these may simply take valuable resources away from your core competencies. Remaining focused on your core business will allow you to gain incremental efficiencies and advantages that will allow your organization to thrive. Take a look at your mission, values and vision and stay true to those.
Is your team well trained? Are there inefficiencies that crept in during the “good” times? Is the organization communicating well? Are your customers happy? Are there things you can improve upon to provide competitive advantage. Contractions expose weaknesses so respond with clear actions and strategies that:
· Engage employees in the solutions
· Keep customers happy
· Take customers from the competition
· Reduce the cost of sales & operations
Don't Cut Back on Marketing
In lean times, many small businesses make the mistake of cutting their marketing budget or even eliminating it entirely. It’s during these times that your business needs effective marketing the most.
Help customers find you and engage them. Marketing doesn’t have to cost a lot if you will leverage social platforms and build a presence. People buy from people they like and they typically don’t like people they don’t know – so let them get to know you and your company and give them a reason to connect and buy.
For additional information on business growth strategies and improvement, take a look at our business coaching program EXCELerate Business or give us a call at 877-689-8256.