With the economy sliding into a recession, business leaders should be taking action now to ensure their survival and continued success.
“Many of our clients are asking us what they should be doing now to prepare for an economy that goes south,” said Matt Kuchinsky, a partner in the White Plains, N.Y., office of Citrin Cooperman.
“As CPAs, we’re always worried about volatility in the marketplace, so the advice we provide now is the advice we’ve provided to businesses all along. Look at 9/11. Many companies weren’t prepared when the economy sank then, and frankly, many companies didn’t make it.”
According to Citrin Cooperman professionals, there are steps owners of privately held businesses can take now to prepare for a sluggish economy. They include:
- Review the budget on a monthly basis. Keeping track of expenses, sales, margins, cash flow and other indicators allows business owners to make informed decisions in an economy that can be shifting relatively quickly.
- Watch receivables closely. They can be an indicator of how hard a business’ clients are being hit by an economic downturn, and could provide an early warning that clients are about to cut back on their purchasing.
- Evaluate all expenses. In a strong economy, business owners may neglect to review – or re-price – the services and supplies they purchase. Review the services to see which ones are no longer needed, and research prices and offerings from different vendors to see if there are cost-effective alternatives.
- Ensure cash flow remains healthy by matching account receivables to accounts payables. Review and revise processes for collecting payments, and get more aggressive with reminders and phone calls when payments are late.
- Offer credit card payment options to slow-paying customers. Swallowing a 1.5 percent processing fee to the credit card companies is a small price to pay for having the cash on hand to operate your business.
- Take advantage of services offered by the bank. Services such as “sweep accounts” push money in an interest-bearing account from a business’ checking account each night, and “sweeps” it back into the checking account in the morning, when funds are needed.
- Refinance debt. As the economy slumps, the Federal Reserve has lowered interest rates. With interest rates low, entrepreneurs may want to refinance debt, or turn their line of credit into a principle and interest loan in order to pay down debt.
- Negotiate with vendors. Many vendors will provide a discount for payment up front. Others will provide discounts to loyal and longtime customers. If cash flow is an issue, request an extension of credit with them, so that the business can pay invoices in 60 days, instead of 30.
- Begin accumulating a cash reserve. Similar to a personal “nest egg,” a business’ cash reserve can be used for emergencies such as a recession, or for special occasions, such as an opportunity to acquire another company. While profits should be used to grow the business and to reward owners and employees, make sure a percentage is reserved for later use.
- Expand services. This may seem counterintuitive, but if a business is financially healthy, it may be able to expand services to take advantage of cutbacks being made by competitors which are struggling.