How to face the unpredictable market

Canadians are a little uncomfortable with the economy

So what can we entrepreneurs do to help prepare for a slowing down of the economy?

It is an understatement to say the economy is unpredictable. Canada and the U.S. seem to be doing better than expected with the many challenges they are facing. I did hear on the news that technically Canada is in a recession but some economists are saying it is strictly related to the oil price problem so is not a real recession.

I read a little blurb in the most recent Research Monitor Newsletter produced by the Chartered Professional Accountants that made me think others feel a little uncomfortable with the economy as well. It said: “Canadian audit committees would like to see the chief financial officer contributing more to the company’s strategy and risk management efforts.” The audit committees were commenting on results of a Global Audit Committee Survey and this comment was particularly pointing to The Canadian Perspective. Members of audit committees assist professional auditors who have to evaluate how businesses are reacting to the global and domestic financial climate and become concerned if they find evidence that a business is not aware of or not preparing for any upcoming financial challenges.

There was an interesting reprint of an article by the Canadian Federation of Independent Business (CFIB) entitled Cash Is King that was reprinted with permission from The Credit Crunch: a Practical Guide, Grant Thornton LLP, 20, and it stated: “Cash is the lifeblood of any business and matters more than earnings. As the saying goes, ‘profits are an opinion, but cash is a fact.’ More and more, bankers, investors and advisory professionals focus on the often ignored cash flow statement.” The warning in the article is just plain logic, but well describes the issue by saying: “In a slowing economy, understanding and managing cash flow is of paramount importance. Customers are likely to pay their bills more slowly, sales and profitability will likely diminish, and banks are less inclined to lend against insufficient or aging collateral. Liquidity can become constrained very rapidly. In recent history, many businesses didn’t keep a close eye on their cash flows or near-term liquidity because it wasn’t necessary. Banks were happy to step in and fill funding gaps.” Notice the statement about help from banks is in the past tense; they are not so willing to help in a financial crunch today.

So what can we entrepreneurs do to help prepare for this situation? The most obvious are creating more cash by working closely with our customers with stricter collection policies and shorter agreed terms and trying to do the opposite with our suppliers by lengthening our credit terms. Selling any old inventory even at lower margins and trying to maximize how quickly we can replace our purchases of goods for resale or materials for production is another possibility. There may be ways to speed up production time so cash is tied up to a minimum. All this is a tedious process but can make major differences in cash requirements. The term “just in time” is common today when related to replacing inventory items. The method needs to be managed closely, however, to be sure suppliers are living up to the agreed delivery terms. We can analyze social programs we may have and see how necessary they are and if there are ways to do the necessary ones more cost effectively. Even employee benefits may have to be more closely monitored and tightened up. The purchase of supplies can be cut to a minimum as well.

There is one other item we should consider. CFIB reminded members recently to “monitor your business credit score to maximize your borrowing capacity.” They gave the three major commercial credit reporting organizations in Canada as being: Dun & Bradstreet, Equifax and Trans-Union. Their advice is: “If you spot an error, contact the credit bureau right away to report it. If the issue is related to data from a vendor, you also need to contact the vendor right away. Learn what steps you need to take to fix the error. Gather all necessary documentation that may help to resolve the situation. Be diligent to ensure inaccuracies are fixed.” Not having credit available could be crucial.

It is true cash is king, but just changing the asset mix from unnecessary inventory and operating with less receivables or lengthening your own payment terms to cash can be short-lived. If you think of your short-term assets as liquid in a barrel, you can switch them around to create more cash, but if you put nothing more in the barrel, it will run dry, so profit or income has to contribute to help keep the barrel full.