The economy is continually expanding and contracting. In fact, since the end of World War II, the United States has experienced a dozen recessions.
Whether you believe that we are in a recession or not, you can be sure of one thing: an economic downturn will come. What’s important is that your business is prepared.
As Shakespeare expressed: “…if it be not now, yet it will come; the readiness is all.”
Effective Cash Management
More than 80 percent of businesses fail not because their sales are unsatisfactory or their jobs unprofitable; rather, they have not appropriately controlled their cash flow.
In a nutshell, a negative cash flow is when your company spends money faster than you can make it within a given period. The result is that you don’t have the funds to pay your bills on time; neither the banks nor your suppliers will extend you any credit. Ignominiously you go out of business—“not with a bang, but with a whimper.”
Effective cash flow management is an ongoing juggling exercise that balances money coming into your business with the flow of money leaving your business.
Knowing where you stand financially is critical when making decisions, such as investing in new equipment.
Assiduous maintenance and a weekly review of key financial reports will provide you with a clear picture of how your money is being spent and help you control spending. Accurate records also ensure that you are paying your bills on time so you don’t incur penalties.
Once you create these reports, updating them will not take much of your time if you do it weekly. Some of the key reports you may need include:
Accounts payable. Review your payables every week, so you track how much cash is outgoing.
Rolling sales forecast. This forecast also helps track trends compared to your historical sales records.
Accounts receivable aging report. If you extend credit to your customers, you need to develop and update an aging report for receivables. It lists outstanding receivables according to how long an invoice has been outstanding and the unpaid balance.
Cash flow forecast. This rolling forecast projects cash into the business from sales and loans as well as estimates for cash out of the business, which includes fixed operating expenses, loan repayments, and a computation for cost of sales (raw materials). You can build your annual cash flow forecasting model in Excel.
Deposits
To improve your cash flow, get deposits on all orders (especially large ones) to cover your raw material, raw labor, and other direct expenses. Many shops require 50 percent down on all orders.
By offering flexible payment terms, you not only make it easier for customers to do business with you, but you also ensure faster payment if you need to extend credit.
Improving Collections
If you have extended credit to any of your customers, they are much less likely to pay promptly during challenging times. Prior to offering terms, always check the client’s credit rating and make sure that you explain your expectations on payment.
Send out invoices immediately after completing the job. This helps speed up collections. Another effective practice to accelerate payments is to offer an early payment discount.
At the time your customer gives you the approval for the order, take the time to review the terms of the sale. Do they understand the terms? Do they agree to them?
When working with a large customer, ask to whom the invoice should be sent (the person who signs the contract, or a specific person in Accounts Payable?).
In the customer’s file, note whether he or she has a history of paying late. Some people will hold on to invoices, especially during an economic slowdown, until you call them. Consider sending them a friendly reminder a week before payment is due, asking if they are satisfied with your work.
When you call, politely request the reason for the slow payment. Was there a problem with the order or the invoice? What can you do to speed up the payment process?
If payment is delayed, your collections person needs to follow up, inquiring about the reason for the delay. Then get an agreement regarding when they promise to pay within a certain period. If the customer fails to keep his or her promises, follow up immediately!
Build Your Cash Reserves
In a recession, the health of a company’s cash position is often precarious.
Cash position simply denotes how much cash your shop has on hand at any specific point in time. This comprises the current amount of money that you have in the bank as well as your receivables and any liquid assets that you can quickly turn into cash (if conditions require).
Securing Lines of Credit
Prepare for the worst-case scenario before an economic downturn impacts your business.
In planning for the possibility of a cash shortage, you need to meet with the bankers where you have your company accounts because you already have a relationship there. Discuss the various lines of credit that are available to your business and the steps you need to take to qualify for additional lines of credit, and how much you can get. If you already have a line of credit with a bank, see if you can have the credit limit extended.
Investigate the advantages and disadvantages for each line of credit option. These options could cover secured and unsecured business lines of credit, a home equity line of credit, credit cards, and checking line of credit. Secure these lines of credit before you need them.
Best Purchasing Practices
With an eye for lowering shop costs, you should review your purchasing practices. To that end here are some suggestions:
- Reassess the purchasing authority in your shop (in other words, who can and cannot make a buying decision).
- Get bids on everything you buy.
- Only buy what is absolutely necessary (for example, if everyone in your shop has a cell phone, do you really need a landline? Probably not).
- Consider buying used furniture and equipment.
- When you need new equipment, consider leasing versus purchasing.
- Before the economic downturn affects your business, start negotiating with your distributors for more flexible payment terms. During an economic decline you may also have an opportunity to renegotiate equipment-leasing terms.
Better Inventory Management
Inventory management is especially important in a recession, because the more inventory you have, the more your cash is tied up. That’s cash that you may need in a crunch for financial obligations, such as paying building rent, making payroll, and so on.
It is always a sound business practice to reduce your stock of raw materials to the bare minimum. When you order material and supplies, make a resolute effort to order less but more frequently. That’s the essence of a just-in-time inventory management strategy.
Of course, you still need a stock of the essentials; other than that, order materials and supplies to fulfill the needs of individual jobs. How to best manage your inventory is a conversation that you should have with your distributor.
By stocking a varied and ample range of raw materials and providing fast delivery, distributors can help shops reduce their inventory by carrying the inventory so you don’t need to, which helps free up your cash.
Buying in Bulk
In some cases, you can reduce your raw material costs buying in bulk. For example, printers may want to buy a commonly used film for stock.
While this can save money, taken to excess you can tie up your cash. You need to decide which items make sense to purchase in bulk and which do not.
The Leasing Alternative
Another way to help maintain a positive cash flow is to lease equipment rather than an outright purchase.
Rather than making a commitment in a new technology, you should also consider farming out work to another graphics provider that does not compete in your market, until the economy rebounds or you have built a sufficient base of business and a positive cash flow to support a new equipment investment.
Improvements in Operations
Analyze the productivity of your shop. One of the best ways to gauge efficiency is to compare actual costs on select jobs with the estimates.
Any discrepancies between estimated direct costs and actual can be a red flag for problems in costing or production. The same goes for variances in cycle time, scrap rate, and returns and allowances.
To quantify the efficiency of your shop, establish key performance indicators for all aspects of job production to correct deficiencies and save money.
Protect your business base. If you apply the Pareto principle to your business, you might discover that 80 percent of your sales come from 20 percent of your customers.
If a group of key customers represents the bulk of your revenues, concentrate your sales efforts on keeping them happy. Institute a practice of calling these key accounts at least once a month, making sure that they are happy with your services. Better yet, meet with these customers face to face over a meal. If a customer is satisfied with the way you handle his account, do not be afraid to ask for a referral.
Probe for additional opportunities. If you’re selling a customer fleet graphics, explore their other graphics needs—safety signage, aisle signage, banners, tradeshow graphics, etc.
Ask open-ended questions to allow them to talk about their needs and problems. Once they reveal their pain points, you have an opportunity to provide solutions that will end their difficulty and distress.
Invest in Marketing. In a recession, many shops reduce their investment in marketing. That’s one of the worst decisions that you could make. Instead of waiting for customers to walk through your doors, it’s time to be proactive.
Being proactive, however, should not carry a big price tag. There are low-cost guerilla marketing alternatives to traditional advertising:
- Phone Prospecting. Initiate an ongoing telemarketing campaign calling your customers and prospects. The objective is to protect your business base, probe for new opportunities, identify changes within an account, and detect threats from competitors. If you are currently selling a customer fleet graphics, what else could your sell them—tradeshow posters, plant safety signage, store graphics, etc.?
- Follow Up on Old Sales Leads. Just because you missed an opportunity in the past is no reason to give up. Most sales are not made until after the fifth sales attempt.
- Direct Mail. Combining direct mail, along with phone prospecting and email marketing, can improve your chances of a sale. You can build your direct mail package around a successful graphics program, a customer testimonial, or a new capability or service that your shop has introduced. Within a few days after mailing, follow up with a phone call, which can dramatically improve your response rate.
- Networking. Continue to build relationships with other business people in your community. For example, if you regularly eat out for breakfast, invite a truck leasing sales person to join you. If you sell fleet graphics, these people usually know when someone is getting new equipment long before you ever will.
- Email Marketing. Periodic email blasts to your customers and prospects serve many marketing objectives. These include building an awareness of your products and services. Newsletters can also establish your company as an authority in corporate graphics. The key to successful digital strategy is to provide value to your audience, in other words, news that the reader can use.
Costing and pricing. During an inflationary period, continually update your costing standards to adjust for increases in raw material and labor.
While you certainly do not want rising costs to erode your bottom line, in times of high inflation, you have an opportunity to test new pricing strategies, thereby increasing your profit margin.
If you have a reputation as the leading graphics company in your market, take the lead in gradually increasing your prices until you start to lose business. In many cases, as you raise your prices, your competitors will take notice and follow suit.
Try different approaches to closing deals. For example, you could offer to sell twenty-five sets of fleet markings for the fifty-set price, if the customer commits to buying the remaining twenty-five sets within a specified time period.
Explain to the customer that the smart money is that inflation is not transitory and prices are expected to rise.
By committing to the additional graphics, the customer benefits by locking in the agreed-upon price.
Conclusion
If the annual inflation rate continues at more than 8 percent, consumer confidence and spending will plummet potentially resulting in what JPMorgan Chase CEO Jamie Dimon forecasts as an “economic hurricane.”
In an effort to combat inflation, the Federal Reserve will likely continue to raise interest rates. While the Fed’s aggressive monetary policy will constrain inflation, the economy will abruptly cool down.
With a recession looming, be alert to warning signs including slowing sales compared to last year and fewer requests for quotes.
In your conversations with suppliers and business associates query them about any changes that they are experiencing in running their businesses.
When the financial clouds begin to darken on the country’s horizon will your business be prepared to weather the impending storm?
Just remember this: When did Noah build the ark? Before the flood!
—Jim Hingst
