The rapid spread of COVID-19 has caused an unprecedented impact on humans, health and the economy. With continued market uncertainty expected for the future, business leaders are rightfully concerned about how their companies will be affected.* In fact, the global economy is predicted to shrink by 3% this year, which will mark the steepest downturn since the Great Depression.** Yet, volatility may provide a chance for companies to employ strategies that increase returns.*
In the face of challenging circumstances and vulnerable risk assets, it's still possible to lead your business through turbulent times with confidence. By assessing your company's position today, you can create a plan to deal with bumps in the road and be ready for opportunities that will come in the future.
A downturn assessment
Managing the COVID-19 downturn starts with asking questions about your business strategy.
- What are the prospects for your industry? A business in a mature, cyclical industry, e.g., auto dealers, can expect disruption during this slowdown. On the other hand, fast-growing businesses with breakthrough technologies might almost be immune to a cyclical downturn. Research shows that technology businesses fared much better in the 2008 recession.***
- How nimble can your business be? Slowdowns might require you to reduce risk and stretch cash. If you are in the middle of a growth initiative with high investment and expansion momentum, slowing things down may not be easy and quick.
- Where is your business most vulnerable? Downturns can bring sales dips that are exacerbated by the loss of key segments or customers. Slowdowns can also expose you to financially weak customers who can’t pay their bills. Some businesses may depend on key suppliers or partners whose weaknesses might be transmitted to your products or services.
- What resources do you have to sustain you during the downturn? Cash reserves and liquidity are invaluable during tough times. Lines of credit and equity backers with additional capital are equally important. Multi-year customer contracts (assuming the customers are financially sound) can keep the business going in a slowdown.
5 Tips to stay ahead of the curve
During the last recession, 86 percent of public companies valued at $50 million or more shrunk.*** Yet, 14 percent continued to grow (at a 9 percent rate) by acting early, maintaining a long-term perspective, and focusing on growth, not just cost-cutting.*** In your plans to avoid recessionary pitfalls, think about these five preparatory strategies.
- Keep the long view in your sights - Before this crisis happened, businesses enjoyed extraordinary access to capital accompanied by high valuations and an active M&A market. Even though those conditions may have changed rapidly, business owners can still consider the longer-term strategic implications of company sales and mergers, division/location divestitures and pursuit of initial public offerings.****
- Reconsider risk-taking - While the lasting economic effects of the COVID-19 downturn remain unknown, business leaders must look for opportunities amid constraints and focus on what they can control. If you are concerned about this slowdown, understand that launching a bold initiative—entering a new market, opening a new facility, acquiring a competitor, etc.—can hinder your strategic maneuverability and sap your reserves.
Think about carefully tuning your mix of initiatives and risks to position your company for success after this period. For example, middle-market businesses have already started shifting growth initiatives toward developing new segments for their products versus more substantial expansions into new markets. These more restrained moves hedge risks in the face of economic slowdown, while continuing to grow and diversify sales.
- Secure capital to survive the downturn - Access to capital is the best insurance an owner can have during a slowdown. Building business cash reserves can provide funds for a downturn. Securing creditlearn about commercial credit through equipment loans and lines, lines of credit, commercial mortgages, and more set up capital access that owners may need. Lining up equity partners or securing a next round of capital are additional methods to make sure your business has that capital it needs to survive the slowdown.
- Tune-up cash flow - Getting in shape to handle this downturn means having cash flow. If you are coming off a growth spurt from the past few years, there are often opportunities to reduce working capital needs and free cash. Collections initiatives that streamline receivables and convert them to electronic payments can reduce days of sales outstanding (DSO), keep cash flowing and prevent customers from stretching payments (essentially borrowing money from your business). Shifting vendors to electronic card payments can stretch your payables and reduce working capital needslearn about working capital. Inventory automation and a reduction of finished product and working inventory and waste can lower your cash needs and put you in a stronger financial position.
Detailed cost reviews, revisiting competitive vendor pricing and budget creation, and monitoring and forecasting discipline can all reduce your business’s cash consumption. That’s a great idea any time and an even better idea right now.
- Be ready to act on opportunities - Downturns offer unique opportunities to create business value. Some of those include:
- Labor and employees - If you’re still hiring during this pandemic, you could find employees with skills and experience that you might not be able to recruit otherwise. And, you may be able to hire them at a bargain rate.
- Materials and services procurement - Look for deals on inputs and productivity tools. Struggling suppliers or partners strapped for cash may offer you once-in-a-lifetime discounts on materials or services contracts.
- Expansion with lower competition - You may lose competitors or see dramatic strategic shifts. Be ready to gain from a changing business landscape. Sales strategy, marketing opportunities and pricing adjustments should all be on the table.
- Acquisitions - Not every business will be properly capitalized or diversified to ride out this downturn. You might be able to buy a competitor for an attractive price and terms.
- Equipment or real estate purchases - Large asset purchases like durable equipment and real estate often suffer from reduced demand and offer sales. Prepare for bargains.
- Capital structure - Business slowdowns can drive down the cost of capital. Consider contacting your relationship manager to review your capital structure for optimal flexibility.
* COVID-19 Worldwide: The Pandemic's Impact On The Economy And Markets, Forbes, April 8, 2020
** Global Economy in 2020 on Track for Sharpest Downturn Since 1930s: IMF, Reuters, April 14, 2020
*** Martin Reeves, Kevin Whitaker, and Christian Ketels, Companies Need to Prepare for the Next Economic Downturn, Harvard Business Review, April 2, 2019
**** Research study of annual revenue for businesses, SunTrust now Truist, Q1 2019
Leading your business through COVID-19
Talk to your Relationship Manager about navigating this slowdown and finding resources for your business.
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