How can businesses avoid financial mistake in a recession?

MD Blog: Justin Fogarty

By Justin Fogarty

This year has been filled with economic uncertainty and it’s likely to drag on into next year with nearly all developed economies in a recession. Whether the recovery is an L shape, U shape or a V shape is still to be determined, although the V shape is looking highly unlikely. How businesses operate and how customers buy changed virtually overnight which has left many business owners with headaches on how they can survive in the new normal. As a business leader it’s important to remain flexible and adapt your operations in order to overcome these economic challenges, and with the right financial planning you can avoid making big mistakes during this recession. Here are some of my views on ways to mitigate financial risks.

Planning for Success

Unfortunately, many businesses don’t have a strong vision or a business plan. This is a huge problem during a recession because you need to have a way forward, a way out of it. Having a strong business plan is your insurance against economic uncertainty. But this is more than getting together around the table once a year and asking how the company is doing. Real strategic planning is needed. A business has to assess where they’re going, where the markets are going, and then properly adjust as needed.

The pandemic was a cataclysmic force that made businesses take action. If they didn’t act, they suffered. For example, zombie companies — those companies that were just managing to survive but had no growth and no future — are failing now. Companies that had a strong business plan could adjust their supply chain and look at their capital structure and personnel and make critical adjustments. They got ahead of things and survived economic uncertainty. They were proactive, as opposed to just reacting to an emergency. Having a strong business plan helps, even when the economy is shaky.

In a recession, it’s critical for companies to take stock of their current situation and check their assumptions. Ultimately, you’re looking for sustainability and to do this you’ve always got to be evaluating and re-evaluating so you’re ready when the market changes. Without that, you can become irrelevant and just disappear. Never assume everything will go as expected — you have to be ready for change.

The pandemic proved that companies can no longer rely on the premise that what happened last year will happen next year too. Having a strong strategic plan is imperative, along with having a really strong strategic team and a good board of directors that are looking forward. You need people who are prepared to adjust on a moment’s notice, instead of looking to repeat what they’ve always done in the past.

Understand your Strengths and Weaknesses

Knowing your company’s weaknesses will make your stronger if you use them as opportunities for improvement. Evaluate your organizational management and assess whether people or departments are doing what they say they’re doing – then cut those parts that aren’t effective. In my experience, I’ve seen businesses that don’t want to change because they’ve always done things a certain way. But if you’re actually losing money that way then you have to change. This doesn’t necessarily mean you have to fire people — you can move them into different roles and make performance much more effective.

In times of economic uncertainty, you need to play to your strengths. Do you have a variety of suppliers and an efficient supply chain? Is your brand recognition high and does the public have a great impression of your company? Unfortunately, you may not be taking advantage of all your strengths. Depending on the nature of the business, you might be ignoring some valuable assets. Do you have patents or trademarks? Are there brand opportunities you haven’t paid attention to? Are there other sources of income you’re missing or costs that are draining the balance sheet, but you’ve been too busy to deal with them? This is a huge mistake. Always look for ways to add value.

Exiting the Business

Of course, selling your business is always an option. However, you need to stabilize the business first and do what you can to enhance its value. Too many times I’ve seen businesses in distress sell too quickly, before they’ve considered all their options. While formal restructuring proceedings have their place, we try to avoid them. Instead, STS Agility gets in earlier and makes improvements wherever possible. Then the business can capture more value when it’s sold, more than if they had sold without us or if they had used a formal restructuring process.

Maybe you were caught off guard by the recession and now you’re struggling. You can take some comfort knowing you’re not the only one in that situation, but you still need a way out. STS Agility supports businesses in distress by coming in and doing a 360-degree evaluation on the entire business, including the capital and debt structure, supply chain, contracts, costs, labour issues and so on. That’s our principal approach. We also consider the macro side by looking at the market and reviewing any potential threats. After this analysis is complete, we come back and see how we can help the business be sustainable. For example, we help companies make management decisions that will improve cash flow. Our goal is to restore value that’s been lost because of a shock, such as what happened with COVID-19.

If you are interested in learning more about our unique process, contact us today.

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