The One Thing Every Business Should Have

Every business owner has a big dream for their business and wants to make it happen. But when a recession comes calling, many business owners don’t know how to weather the storm. They don’t know where to start or what to do leaving them frustrated and worried if their business can survive. Financial security for your business shouldn’t be so hard to achieve during times of economic uncertainty.   

Depending on how you count and who’s counting, there have been between 14 and 19 recessions in the U.S. economy. In my career, I’ve experienced the last 6. We may be in the 7^th as I write this post. Recessions are inevitable, so how do you recession-proof your business? 

If you’ve been following for a while, you know that one of my favorite quotes is, “You can’t manage what you don’t measure.” This is certainly true for any client of mine, which is why we create a financial scorecard.   

If you don’t already have a financial scorecard, the first step is to create one. This scorecard should track at least the following: 

• Profitability, gross profit, and net profit. I suggest you track the absolute number and the number as a percentage of revenue. 
   
• Activity. How are you collecting your receivables and inventory and managing your payables? 
   
• Liquidity. Cash is king; how many days of sales do you have in cash? 
   
• Leverage. How much debt do you have relative to shareholder equity? 

Step two is to look for trends in your numbers. One number is a point in time, two numbers is a coincidence, but three numbers is a trend. Look at your numbers over a period of time and see which way your numbers are moving. 

In a recession, your trends will likely decline. Your profitability may go down because revenue is declining, however margins may remain steady. Your receivables are someone else’s payables and your clients’ receivables are someone else’s payables and so on. There’s a chain reaction that occurs. Because of that chain reaction, your cash may decline because you’re not getting paid, so liquidity will go down too. You may be forced to borrow on your line of credit which will increase your leverage. 

I have a professional services firm that experienced a significant decline in revenue in August. It was about 1/3 of what they did in July. This client typically bills close to the end of the month and to date, this client has only billed 68% of what they billed in August. While there are ten more days left in the month, I’m watching our scorecard and talking to project managers to see if this becomes a trend or not. They are expecting a large receivable to come in at the end of the month. Even without it, cash is still at an acceptable level.

So when you’re preparing your business to be able to weather a recession, your key action items are: 

1. You can’t manage what you don’t measure. Create a financial scorecard and track profitability, activity, liquidity, and leverage. 

2. Look for trends in your business. 

Don’t be tempted to stick your head in the sand if you see a recession coming. Having a scorecard and watching your trends can take you from financial confusion to financial clarity.