Business Operations

Make the Next Downturn Different

Two people looking at a tablet by a robotic assemly line
 

Recession worries have jumped up the list of economic concerns for middle market business owners while confidence in the global and U.S. economies has fallen from last year’s levels.1 Business owners point to the hobbled U.S. economy as having the greatest potential impact on their business and their greatest barrier to growth.1 Fortunately, they still place their greatest confidence in the outlook for their own businesses - sixty-nine percent expect a much or at least somewhat better economic future for their businesses.1

While the economic signals may be flashing yellow, that doesn’t mean it’s time to move your business into a reflexive crouch, even if the 2008 recession holds painful memories. Preparing for the next downturn starts with a frank assessment of your business’s positioning today and then planning for the bumps and opportunities that will come with the next slowdown.

Lessons from 20082

The 14 percent of public companies that grew during the last recession:

  1. Acted Early
  2. Took a long-term perspective
  3. Focused on growth, not just cost cutting

A downturn assessment

Preparing for tomorrow’s downturn starts with questions about today’s strategy.

What are the prospects for your industry in a downturn? A business in a mature, cyclical industry, e.g., auto dealers, can expect disruption during a slowdown. On the other hand, fast-growing businesses with breakthrough technologies might almost be immune to a cyclical downturn. Research shows that technology businesses fared much better in the last downturn.2

How nimble can your business be? Slowdowns might require you to reduce risk and stretch cash. If you are amid a growth initiative with high investment and expansion momentum, slowing things down may not be easy and quick. 

Where is my business most vulnerable? Downturns can bring sales dips that are exacerbated by the loss of key segments or customers. Slowdowns can also expose you to financially weak customers who can’t pay their bills. Some businesses may depend on key suppliers or partners whose weaknesses might be transmitted to your products or services.

What resources do you have to sustain you during the downturn? Cash reserves and liquidity are invaluable during tough times. Lines of credit and equity backers with additional capital are equally important. Multi-year customer contracts (assuming the customers are financially sound) can keep the business going in a slowdown.

The path to preparation

Your downturn assessment sets the starting point for your preparation. SunTrust Business Pulse Research shows that many businesses have already started taking actions to prepare for a downturn. That preparation could give them an edge to help them actually grow through a slowdown. During the 2008 recession, 86 percent of $50 million plus public companies shrunk. Yet, 14 percent continued to grow (at a 9 percent rate) by acting early, maintaining a long-term perspective and focusing on growth, not just cost cutting.2

In your plans to avoid recessionary pitfalls, think about these preparatory strategies. 

1. Take Advantage of Today’s Capital Markets. Businesses have been enjoying extraordinary access to capital accompanied by high valuations and an active M&A market. Those conditions will change in a downturn. Business owners who want to take advantage of today’s favorable conditions have stepped up company sales and mergers, division/location divestitures and pursuit of initial public offerings.1

2. Reconsider Risk-Taking. It’s difficult to predict when a slowdown will happen much less what will happen when the economy downshifts. That puts a premium on flexibility so a business can react to economic, market and business changes. If you are concerned about a downturn, understand that launching a bold initiative – entering a new market, opening a new facility, acquiring a competitor, etc. - can impinge on your strategic maneuverability and sap your reserves. 

Consider carefully tuning your mix of initiatives and risks to position you for a downturn. For example, middle market businesses have already started shifting growth initiatives toward developing new segments for their products versus more substantial expansions into new markets. These more restrained moves hedge risks in the face of economic slowdown, while continuing to grow and diversity sales. That diversification will be a plus if a downturn hits.

3. Secure Capital to Survive the Downturn. Access to capital is the best insurance an owner can have during a slowdown.

Building business cash reserves can provide funds for a downturn. Securing credit through equipment loans and lines, lines of credit, commercial mortgages, etc., sets up capital access that owners may need. Lining up equity partners or securing a next round of capital are additional methods to make sure your business has that capital it needs during a slowdown.

4. Tune up Cash Flow. Having the funds to cover operating costs and pay vendors is at the top of the list of concerns for business owners.1 With today’s increasing operating costs, cash to pay bills is second on the list of obstacles businesses face.1 These concerns will likely be multiplied in a slowdown.

Getting in shape to handle a downturn starts with cash flow. If you are coming off a growth spurt from the past few years, there are often opportunities to reduce working capital needs and free cash. Collections initiatives that streamline receivables and convert them to electronic payments can reduce days of sales outstanding (DSO), keep cash flowing and prevent customers from stretching payments (essentially borrowing money from your business) during a downturn. Shifting vendors to electronic card payments can stretch your payables and reduce working capital needs. Inventory automation and reduction of finished product and working inventory and waste can lower your cash needs and put you in a stronger financial position.

Detailed cost reviews, revisiting competitive vendor pricing and budget creation, monitoring and forecasting discipline can all reduce your business’s cash consumption. That’s a great idea any time and an even better idea in the face of a slowdown.

5. Be Ready to Act on Opportunities. Downturns offer unique opportunities to create business value. Some of those include:

  • Labor and employees. When the labor market cools, you can find employees with skills and experience that you might not be able to find otherwise. And, you may be able to hire them at a bargain rate.
  • Materials and services procurement. Look for deals on inputs and productivity tools. Struggling suppliers or partners strapped for cash may offer you once-in-a-lifetime deals on materials or services contracts.
  • Expansion with lower competition. You may lose competitors or see dramatic strategic shifts. Be ready to gain from a changing business landscape. Sales strategy, marketing opportunities and pricing adjustments should all be on the table.
  • Acquisitions. Not every business will be properly capitalized or diversified to ride out the recession. You might be able to buy a competitor for an attractive price and terms.
  • Equipment, real estate purchases. Large asset purchases like durable equipment and real estate often suffer from reduced demand and offer sales discounts during downturns. Be ready for bargains.
  • Capital structure. Business slowdowns can drive down the cost of capital. Whether debt or equity capital, be ready to explore.

Prepare your Business for the Inevitable

Talk to your SunTrust Relationship Manager about how you can be ready to win when a downturn happens.

SunTrust Research with 516 businesses (annual revenue between $5 million and $250 million) conducted in Q1 2019.

2 Companies Need to Prepare for the Next Economic Downturn, Martin Reeves, Kevin Whitaker, and Christian Ketels, Harvard Business Review, April 2, 2019.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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