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Economic Report: Resilience

Published Monday Nov 9, 2020

Author Ken Sheldon

Economic Report: Resilience

Even if all business owners and executives only had to worry about the quality of the company’s products or services and continued growth of its customer base, running a business would be challenging enough. However, companies are dealing with economic and environmental forces beyond their control. In the economic cycle there’s a change: disrupted cash flow, tightened access to credit, rattled customers and suppliers, and many organizations feel their very survival is threatened.

The coronavirus outbreak has companies of all sizes rethinking their short- and long-term plans. Weathering ever-evolving conditions involves keeping up with industry trends and forecasts, following broader assessments of the economic outlook, ensuring the safety of employees and, most important, taking a close look at operations. A careful review of internal processes and key relationships may prompt changes to make the business more efficient, flexible and resilient. As businesses respond to current conditions, here are some challenges and key steps to keep in mind:

Look at Cash Flow
Cash flow can be a central challenge for businesses and is often cited as a top reason small business fail. Companies with great products and loyal customers can falter when they don’t have sufficient liquidity to meet payroll, pay suppliers and keep the lights on. To safeguard against temporary shortfalls:

• Ask your banker about overdraft protection;

• Speak frequently with customers and suppliers to stay aware of any potential changes in their businesses that could ultimately affect yours;

• Review how reliably customers pay what they owe and create a watch list of those who consistently fall behind. A little probing may help address issues proactively.

Assess Your Credit Situation
Credit can be a lifesaver during challenging financial times. During the recessions of 1990-91 and 2001, the growth rate for commercial banking loans to businesses dropped to zero, according to the Federal Reserve Bank of St. Louis.

In a difficult economy, lenders may be especially cautious about companies they don’t know well. In fact, most lenders like to understand how a business performs over an entire business cycle. During good times, did the company make capital expenditures to grow the business? During bad times, did the company respond well to downturns? Knowing that the business has weathered challenges and responded effectively may give a lender the confidence to extend credit.

Provide Survival Training
When a cyberattack takes down the company website, a key employee leaves the firm or a natural disaster strikes, a company’s everyday operations can be threatened. The risk of adverse events may be greater than a business owner or executive may think, and they can be particularly devastating during times of economic stress.

By 2018, business cybersecurity breaches had increased by 67% in five years, according to Accenture’s 2019 Cost of Cybercrime Study, and during the first seven months of 2019, the U.S. experienced six climate and weather catastrophes with losses of more than $1 billion each, according to the National Oceanic and Atmospheric Administration. One in four small businesses fail to reopen after a natural disaster. Preparing a company to withstand challenging circumstances can make the difference between re-building and going out of business.

Keep Tabs on Expenses
During the Great Recession of 2008-2009, nearly 75% of company leaders identified cost cutting as a top priority, according to the 2010 McKinsey Global Survey. However, trimming expenses across the board during an economic crisis can backfire.

Instead, take stock now of all processes, from front-line to back-office functions, to determine what kind of savings might be possible when needed.

Make a plan for what to cut. Work through “what if” scenarios ahead of a downturn to determine the least painful and most effective reductions. Consider renegotiating agreements with suppliers or adjusting payment terms to align with revenue cycles.

In addition, automate where possible. An estimated 45% of jobs now performed by people in the U.S., at an annual cost of $2 trillion, could be automated with existing technologies, according to a 2015 McKinsey report.  Administrative tasks like payroll, and other record-keeping, can often be digitized at minimal cost. However, be careful when it comes to reducing headcount. Automation can be an opportunity to retrain or refocus employees on more value-added areas of the business.

Competing in business requires endless resilience amid disruptions that can reinvent entire industries without warning. These best practices can help make a company stronger in the face of challenging, and often uncontrollable, external forces. The more planning that is done for essential aspects of a company’s financial future, the more control a firm will have over its future success.

Ken Sheldon is the NH market president and global commercial bank senior relationship manager for Bank of America.

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