Your guide to surviving and thriving
With inflation hitting almost 40-year highs, a recession is increasingly probable. While the future is not set in stone, businesses need to start planning to ensure they can navigate a potential economic slowdown from a confident position.
Focus your time on major priorities
Yohaan Thommy
Make time to revisit your business models and any assumptions you have made about the economy. Set aside at least a half-day with your top decision-makers to scenario plan how a recession could negatively impact your business. Areas you’ll want to study include your gross margins, net margins, sales, various channels, markets you operate in, and risks to your customer base.
A six to seven per cent inflation rate will erode earnings regardless of your performance over the last year. This means a profitable company that generates 10 per cent earnings before interest, taxes, depreciation, and amortization (EBITDA), with inflation at present levels, will see its profitability wiped out within 18 to 24 months. So, determine what’s driving your margins, there’s a direct line between predicted costs and predicted profits.
Finally, dedicate time to thinking about the labour shortage. The country’s aging population and accelerated retirements through the pandemic have caught many organizations unprepared for the staffing challenges. How could this impact your organization?
Prioritize high-margin products and services
Look for efficiencies in your business. Focus on products and services that provide you with the best margins and be willing to compromise on those with high overhead and low returns. It may be time to rethink how to go to market or if you go to market with these products and services.
The pandemic has moved businesses from a “just-in-time” model to a “just-in-case” model.
This could create greater risk in a market slowdown and leads to cost conversions (how long it takes to turn your inventory to cash). You might consider shelving items that take longer to sell and focusing on those that bring cash in quicker. A supply chain evaluation can help you identify opportunities to shorten lead and “procure to sale” cycle times, which will improve your ability to convert cash quickly, carry less inventory, maximize margins, and ultimately minimize risk. Cash flow planning will be critical moving forward.
Some blue skies
There are opportunities to be found during times of recession and a prepared business may find itself in a position to capture market share and grow through consolidation.
As businesses emerge from recessions or periods of economic uncertainty, there are often opportunities for those seeking to grow through acquisitions. Businesses that are struggling because they couldn’t make changes, cut costs, and manage cash flow may provide strategic merger opportunities at a discounted price.
On the flipside, businesses looking to exit should conduct a readiness study. The assessment will identify and provide a plan to eliminate any value inhibitors prior to putting the business on the market. You’ve worked hard to build your business. This process will help you “stage it for sale” and maximize the return on your investment.
Be self-aware
Many businesses have enjoyed great returns over the past several years and are managing their entire business based on their current financials and what’s in the bank account. They’re not looking ahead and scenario planning. They’re not asking, “what if…?” What if input costs soar? What if sales drop? What if key employees retire or quit?
You need to be proactive as concerns of a recession continue to grow. Engage in an enterprise-wide organizational review with an independent performance improvement team who can provide unbiased insights into which products and services provide the best returns, where your prices could and should be, and where your opportunities lie.
Remember, if inflation is expected to be six to seven percent over the next two years, you’ll need to find the same percent in cost, or price improvements, just to preserve the status quo.
Conclusion
Take time to plan; this includes:
- Reviewing your business models with senior staff
- Assessing your priorities, risks, and impacts on your business
- Incorporating inflation into your pricing models
- Paying down debt
Have a rainy-day fund to ensure your business has enough cash to ride out a recession.
Focus on returns: Look at your inventory, cash conversion, margin, and overhead and be prepared to let go of burdensome products and services. If you haven’t already, switch from a just-in-time to a just-in-case approach to inventory.
Finally, always look ahead. Many businesses have had their best financial years recently, but world economies are still volatile. A business that anticipates and gauges challenges is more likely to overcome them—and outperform their competitors.
Yohaan Thommy, LSSBB, PMP,CMC, is a Partner with MNP and leads the firm’s performance improvement practice nationally. Yohaan focuses on delivering measurable financial results for his clients, helping them make their organizations more valuable while bringing greater financial predictability. Yohaan’s services include performance improvement, training on revenue growth and sales, helping with supply chain management and conducting business process reviews to improve operations.
Yohaan Thommy , PMP, LSSBB, CMC
Partner, MNP
905-247-3254
Yohaan.Thommy@mnp.ca
