A few weeks ago we gave some insights on “How To Make Your Business Recession Resistant”. In part 2 of this series, we will continue to give you our insights and what we believe will help your business stay afloat during economic downfall.
1.Understand (and Manage!) Your Cash Flow. Profit does not equal cash flow. Cash flow does not equal profit. Do you want a ridiculously simple example of this? Great, here’s one: suppose you are building a bridge. Your price is $1,000,000 and your cost is $500,000. Your profit is $500,000 and you send out a bill for $1,000,000 upon completion, but you will not be paid for 60 days. What is your cash flow at that moment? It’s negative $500,000 because you had to pay for labor and materials, but you’ve received nothing yet. Now, what if you had a line of credit from your friendly local bank, with a limit of $500,000? You could borrow on that line and fund your entire cost with it, and pay back the line balance upon receipt of your $1,000,000. True, you would have the net cost of interest expense on the $500,000 loan for 60 days, but that cost is nominal versus the benefit of having your cash replenished. Of course, another way to mitigate negative cash flow is to negotiate better business terms, such as requiring a partial deposit prior to starting the job – at least enough to buy some materials and make the first couple of payrolls.
A familiar refrain from business owners goes something like this: “My accountant says I made money last year…so, where is it?” Learning to manage your cash flow by doing simple things like establishing favorable payment terms and applying for a bank line of credit is key to surviving a recession. And remember – when business is good, that’s the time to ask your bank for that line of credit – don’t wait until you are desperate for cash. Approach the bank when you are at your strongest!
2.Pay Your Employees for Performance (No, Really, I Mean It). This could easily be a blog article all by itself, but I’ll keep it to just a teaser. Work with your trusted advisor to determine attainable metrics for each key personnel position in your administration. These may include your C-level team, your middle management, sales and sales management, and any of your employees whose work is billed to your customer. At CLM Advisors, we help our clients design such models every day. Why is it so important? Because the problem that kills businesses fastest is not having too much overhead – most executives know how to cut that down if necessary. No, the killer is having direct compensation costs that are not tied to productivity, and then seeing that productivity decline. Without a performance-based compensation model, you will waste precious time trying to figure out where the inefficiency is occurring.
The key here is, you must get “buy-in” from your key employees understanding their earnings potential and conforming their job behaviors accordingly. Remember, any performance metric given to an employee must be substantially within that employee’s control.
3.Communicate Efficiently (and Often). Here’s a “softer” skill that should be learned and reinforced throughout your organization. To have a high-functioning organization that maximizes gains, you must have good internal and external communications. Strive for the three “C”s: Clarity, Conciseness, Conformity. Clarity is achieved when your emails and speech are unambiguous and establish easy-to-understand expectations. Conciseness means that you stay “on point” and stay away from long, unreadable emails. Also, refrain from including two dozen people on an email that only requires action from one or two. Conformity means that everyone should use the same protocols on when to pick up the phone versus using email, and when emailing, what format should be used (every single time). One other point on this: yes, it may be almost 2020, but when it comes to business communications, handle it like the early 2000s: send an email, or call on the phone. Save the texting for quick reminders and personal communications. Business owners who communicate clearly establish credibility and trust with their customer base, will gain a superior reputation that will pay dividends in a time of economic slowdown.