Preparing Data for a Downturn
As a CEO or CFO, you must leverage your company’s data to clearly understand your current economic standings. As you prepare for the inevitable ebb and flow of business, some best practices ensure that your company is protected as market conditions.
The first and most crucial area for any CEO or CFO is to ensure data accuracy. In accounting, we commonly hear “garbage in, garbage out,” meaning if you put in bad data, you will get a bad or useless result. If you’re working with bad data for over a year or 18 months, your result will be very wrong by the time the project is finished. It’s estimated that bad data costs companies between 15 and 20% annually.
Data doesn’t have to be perfect to be good, but it should be as clean as possible. More importantly, it should be timely and current. Data ages out. Some data, particularly in accounting, ages out very quickly, so ensure you’re working with the most current data you can get your hands on. It is also important that your data isn’t siloed. If data lives in disjointed google sheets and systems, then it can often be difficult to to get accurate financial metrics.
When interpreting the data, be sure you understand your overarching goals. Know your markers for success—the KPIs that actually matter. What does the benchmark look like? How can you plug your data into your KPI dashboard or have systems that feed data into your dashboard in a way that’s helpful, useful, and easy to interpret?
Don’t sweat the small stuff, but always pay attention to the little issues that will likely trip you up down the road. Those little issues hiding in your system will become evident if you regularly check your data and review your KPI dashboard. Address them now because they will mess things up down the line.
Manage Debt, Cut Expenses, and Strengthen Your Reserves
Efficiently managing a smaller cash flow is critical in an economic downturn. It is essential to keep your perspective and avoid the urge to micromanage or become myopic, losing sight of the bigger picture.
When it comes to cutting expenses, they often are what they are. The amount your office manager spends on pens and notepads doesn’t really matter to your bottom line or your big picture. So delegate the little stuff, trust your people, and have someone else look at and manage the minutia.
Sometimes businesses want to rush debt repayment to strengthen their balance sheet. While this can be a good idea, it’s also worth noting in an environment where interest rates are rising, your current debt may become very inexpensive compared to new debt. It may be better to sit on cash reserves and pay the minimum for a period of time.
As the CFO or CEO, what are your highest priorities? Examine the more significant items like labor costs. Can you shore up gaps in the more significant areas? Are these higher expenditures critical in an economic downturn? It’s also important to note that we’re talking about cutting costs when the general cost of living around us is rising. Many CEOs have budget goals that aren’t realistic for the current environment. While we want to be conservative with spending in times of recession, it’s also vital that your team has the tools that they need to do their job and produce a quality product.
Building Up Strength Before a Recession
Logic says to pay off debts when going into an economic downturn, but that’s not always the best approach. Instead, it’s wise to pay the minimums for now. If you have cash, keep it. Nothing conquers problems like cash in hand.
If you have investments, ensure that they are easy to liquidate if a recession should hit. For example, real estate is a common, conservative investment, especially with inflation. But should the need to liquidate arise, money invested in real estate can be hard to access. So make sure you can access some of your cash quickly.
Low-risk investments are low-yield and often high maintenance. So in many ways, it’s wiser to have accessible cash in the bank when facing a period of financial strain.
Know Your Why
Why is your company successful? What makes your company tick? If you don’t know the standard costs and data, it’s almost impossible to understand the success. You need to have a handle on your job costs.
Costs are increasing, but the price in the market isn’t always keeping up. Job costing comes into play by understanding your margins. If you lose money on a job, make it deliberate—not by accident. Look at the details and know what the market can bear, so you don’t drive customers away.
You can never have too much good data. So if you see an economic downturn on the horizon, start putting everything together right now, especially if you have the time and the human capital. Go into the situation with your eyes wide open—with an awareness of the environment and where you stand. Check your processes, clean up your data, know what makes your company run smoothly, and proactively put measures in place to hold it there. It may require new business and accounting software such as an ERP, CRM, or estimating system to make sure your employees are putting data in centralized locations.
Learn from the Past
The last big recession was in 2008, but we can look back at that time and other past economic crises and apply that information to our business today (even if your business wasn’t around back then).
During the recession of 2008, companies that didn’t go under had record years as they came out of the recession. The competitive field had diminished, and the fittest survived. It’s crucial to establish your current picture so you can continue to deliver for your customers, adapt, and find new ways to keep them satisfied with less resources. As we come out of recession (which we will), continue to look for opportunities and take a bullish approach.
Pinpoint the Right KPIs to Watch
Your KPIs are crucial to monitoring your current health and keeping an eye on your financial landscape, but which KPIs should you be tracking? CEOs and CFOs who are preparing their business for an economic downturn should keep an eye on:
Aging A/R: Stop selling to customers who aren’t paying. For those struggling, work out installments to ensure you can keep up your revenue. Look at the good customers paying on time and ensure they stay current.
Days in Inventory: Seeing the days-in-inventory number go up isn’t necessarily bad. Some clients stock up when things get rough to avoid supply chain shortages, shipping delays, and potential rising prices. It’s crucial that if this KPI grows, you understand why. The number can indicate a loss of business, resulting in inventory that sits in your warehouse. While that might not be entirely in your control, you can adjust what you’re pumping into inventory to accommodate the downturn.
Revisit Your Budget: Budgets shouldn’t be stagnant. Look at your updated 30-day cash flow forecast. Be sure that your budget explains the how and why behind the numbers. Who is in charge of each segment? Revisit the budget regularly and look for projected downturns. Anticipate that they may continue to get worse and work on a strategy that still enables you to reduce expenses in ways that don’t impact the customer experience or leave you with little to no money for marketing and sales activities.
Check Your Debt: Look at your debt too, but don’t rush to pay it off. You may have a great interest rate relative to future interest rates. One upside to inflation is that old debt becomes cheaper. On the other hand, it may also be more challenging to get financing in the future, so the interest you’re paying in the meantime could be well worth the price.
Know the Top Financial Challenges to Help Your Company Weather the Storm
The top financial challenges for any small or mid-sized company are cash flow, rising prices, payroll, and securing financing. Keeping these four items in mind as you prepare your business for an economic downturn will help you take proactive steps.
Cash flow is difficult if your customers stop paying, of course. Even good customers can become bad payers during an economic downturn. So be sure to free up as much cash as possible (and hold onto it).
Rising prices affect everyone right now in a big way. Keep your eye on your profit margins as the cost of sales increases. Don’t forget to check out the price that your competitors are selling at. You want to balance raising prices to stay profitable and retaining your clients by not pricing too high. It can be worth the risk if you stay flat for a few months to maintain your customer base. In terms of cost savings, there are companies out there that can help you identify new vendors with lower prices. Many of these vendor evaluation companies will analyze your spending with no upfront cost and simply take a percentage of the total savings they have helped your business realize.
Payroll is a big hit for many small businesses. For most companies, it’s somewhere between 10-30% of gross revenue. Knowing how to tighten up payroll can be a challenge, with many variables to consider. If your business is taking a significant hit, you may need to let staff go temporarily. It’s hard to cut back, especially when workers are difficult to find right now, but if there isn’t enough work to go around, carrying those extra wages isn’t viable. Doing a trim right now is better than everyone losing their job when push comes to shove. Trim the 10% to save 90%. Additionally, look to outsource work to agencies and firms if you need capacity to get work done but don’t want to commit to hiring new employees. For example, you may need IT or technology support. Instead of hiring an IT Director, simply outsource that work to an IT firm that will likely be lower cost than hiring an employee and give you flexibility to scale back services if the economy requires you to cut expenses further. As you can from the graphic below, more companies than ever are leveraging outside contractors and experts for their operational functions such as IT, accounting, marketing, and more.
Securing financing is another considerable challenge during times of financial crisis. Some businesses look to their bank to get them through by increasing their LOC (line of credit). If you think you will need to borrow, do it now while your numbers are still strong. Banks are often hesitant to lend when books are moving in the wrong direction–even if you’ve been with the lender for a while—especially during an economic downturn. Take steps to position yourself strongly and strategically today.
Economic ups and downs might be inevitable, but you can take the right accounting steps to strengthen your business and ensure you’re ready for whatever comes your way.
My specialty is serving as a fractional CFO for small- and mid-market companies. Many companies need CFO support, but hiring a full-time CFO is expensive. I help clients find ways to outsource those important accounting and financial management tasks to get the expertise at a fraction of the cost.
After working with many companies, large and small, some universal rules can help all organizations improve their accounting practices. It’s especially crucial to optimize financial processes when business is going well.