How to Prepare for an Economic Downturn
Planning for upturns and downturns in the business cycle can mean the difference between prosperity and failure. Forewarned is forearmed, and business executives should plan for the worst as well as the best.
There are three fundamental steps one can take to ensure their companies not only survive but thrive during economic turbulence.
1. Understanding the Company’s Key Drivers
One of the best steps a company can take to protect itself from future upheavals is to identify and understand its top five or six key business drivers.
This list of essential drivers will vary from business to business. An exporter might be particularly susceptible to currency fluctuations; a malting company needs to monitor the cost of grain; home insurance companies might watch natural disaster statistics.
The National Australia Bank Group recommends identifying business drivers that are measurable, can be compared to a standard—such as a budget, last year’s figures or an industry average—and can be acted upon.
Taking time to understand your key business drivers makes good business sense and may turn a looming crisis into a gainful opportunity.
2. Using Forecasting and a Sensitivity Analysis
Companies need to create accurate forecasts to prepare for the future. One key forecasting tool is a sensitivity analysis—also known as a “what-if” analysis—on industry changes and economic fluctuations. Executives should build models that show how change will affect their key business drivers. They should anticipate their cash needs in the event of a significant downturn.
3. Having good banking relationships.
The worst time for executives to come knocking on the door of a bank is when their companies are in trouble. Many smaller companies don’t plan that far ahead and, when they hit a liquidity wall, can’t get bridge financing to tide them over. Many end up closing their doors.
Companies are wise to set up a line of credit with a bank, even if they don’t immediately need it. That way they can solidify their borrowing credentials before times of emergency. Executives have to know how to present the kind of operational and financial data bankers need to feel comfortable lending them money. Building a good working relationship with a bank before a crisis occurs is a fundamental step in preparing your company for anything the future has in store.
Businesses can never be too prepared, and effective planning can make all the difference. In the world of finance, an ounce of prevention really is worth a pound of cure.
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