How can you prepare for success when the economy slows or accelerates?
While the economy has remained strong into the third quarter of 2019, there are signs that the economy may slow down toward the end of the year. Firms in all sectors are thinking about the right business decisions at the end of the most recent economic expansion. Companies serving consumers are faced with unique issues and should be prepared for the future. One of the questions often raised by retail businesses and other consumer products organizations is: how should we prepare for a slowdown?” Perhaps the better question is, however, “how can we prepare for success when the economy starts to accelerate again?”
While the most recent recession was roughly 18 months in length, the average recession in the United States is closer to one year in length. Keeping that in mind, a good late-cycle business practice is to have both a short-term and a long-term forecast and business plan. The short-term forecast and plan may include the expected impact of an economic slowdown. Your longer outlook and planning efforts are where good decisions can lead to accelerated growth. To that end, note the following short- and long-term planning checklists to consider related to your business’ strategic economic growth.
SHORT-TERM PREPARATIONS
• Smart inventory management – When consumer spending slows, having excess inventory on the balance sheet that isn’t selling can contribute to cash flow challenges. Liquidate excess or obsolete inventory and focus on stocking discount or inelastic stock keeping units.
• Trim the fat – Profits hide a lot of sins. After a long period of growth, it’s very easy to have overhead, expenses and other general and administrative costs that aren’t managed as closely. Take the time to review expenses and make good decisions now to create some additional free cash.
• Secure your workforce – Unemployment is already at historic lows and firms in the consumer space are still struggling to find good labor. Invest in your key employees, but review benefits and other incentive programs to ensure they’re designed to maximize retention at a cost that is manageable.
• Focus on process improvement – A thorough review of processes and procedures, both on the operational side of the business as well as within the back office, is always a healthy practice. These exercises almost always lead to improvements and efficiencies. The trade-off is that it does require time and money, both of which become more scarce during a period of slower growth. Make the investment now and the return on that investment will come when you may need it most.
• Re-negotiate vendor and customer arrangements – Negotiating pricing with vendors and customers can be a long process. Review all long-term arrangements and take advantage of the current strength in the middle market to re-negotiate arrangements now.
• Create appropriate cash reserves – Cash is king. There are a number of ways to help manage your cash if sales level out. As mentioned above, liquidate any inventory that might sit on your balance sheet if consumers slow spending. It’s also a good idea to review payment terms, both with your own customers as well as with your vendors. If you can negotiate better payment terms on either side it can have a significant impact. It’s also important to take advantage of existing payment terms. If you have better payment terms with certain vendors, or you make early payments, be aware of where you have flexibility.
• Secure financing – Interest rates are very low. Review your short-term forecast, together with your longer-term forecast and investment strategy (see long-term below). Negotiate the best financing possible to carry you through both your short- and long-term plans.
• Evaluate tax considerations – Assess your tax situation and make sure you are positioned to take advantage of all benefits.
• Assess risks – Evaluate risk of cyberattacks and ensure you have insurance to mitigate your risk.
• Address underperforming areas – If you have underperforming store locations, products or customer segments, address them now.
LONG-TERM PREPARATIONS
• Identify acquisition opportunities – Not everyone will be prepared for a slowdown. Know your competitors and which ones may struggle if sales slow. If a strategic acquisition can help you take market share when the economy begins to accelerate, identify the competitors or the assets that would be a value accretive to the business.
• Explore new product offerings – In the early stages after a recession, consumers have pent up demand after sticking to staples. Identify the next trending items and be prepared to bring them to the market when the time is right.
• Evaluate customer base – Identify your loyal and profitable customers and develop strategies now to retain them. Work across all channels to build a strong relationship that can weather a recession.
• Invest in technology – A slowing economy will not change the fact that consumer buying habits are changing. Make sure you have a digital strategy and road map that will position the company to take advantage of strong consumer demands when the economy picks up on the other side.
While many of the suggestions above make good business sense in any economy, they become even more important in an economic slowdown. Mobilizing your management team and outside business advisors to address these issues can help you ensure success now and in the future.
Christopher Shaker is a Partner and Consumer Products Senior Analyst at RSM. Learn more at rsmus.com.
