Since the start of the pandemic, many organizations have understandably been focused on their day-to-day survival. Some long-term plans and even short-term initiatives were suddenly put on hold. While businesses are likely to continue feeling the impact for quite some time, it’s also provided an opportunity to think about the future of your organization.
Even with the current uncertainty, however, business leaders should always be asking themselves where they see the business going in the next five to 10 years. But right now you may also be asking yourself: Is this still where I want to go? Is it a realistic timeframe? And, perhaps most importantly, have I set myself up to get to where I want to be?
The new realities have created the need to explore new strategies and tactics that have the potential to put you and your business in a better position to execute your long-term goals.
Maximizing liquidity is a crucial step in positioning your business to take advantage of future opportunities, and managing debt is an essential component of any liquidity strategy. It starts with looking at how your debt is structured and finding areas of improvement.
Take capital expenditures. Do you usually use cash to purchase equipment? If you anticipate upcoming capital expenses, an equipment lease could allow you to acquire the equipment you need without tying up your cash, giving you the flexibility to reinvest in other parts of the business to generate a higher rate of return.
Look closely at other areas, such as a working capital line of credit, to see if there are more optimal ways to restructure your debt based on how your company currently operates. This is especially notable if your company has evolved since originally negotiating the terms of your debt.
It is important to not structure and size loans based on what has worked for you in the past, but to assess whether it is set up in a way that allows you to free up cash.
IMPROVING CASH FLOW EFFICIENCIES
Along with managing debt, optimizing your working capital is key in a tight margin environment. Chances are there may be more efficient ways to manage receivables, streamline your payables or deploy funds to areas to grow your business.
If you want to get to where you want to be in five years, you may need to make changes to your treasury and finance operations. Strategies and tactics designed to build liquidity and improve debt management can help get you there.
When looking at receivables, you should assess how long it takes between when you get paid and when you’re able to use those funds to pay your vendors, or to deploy them in a way that helps grow your business. Are you taking payment methods that get cash into your account right away?
For payables, consider alternative payment methods. You can ask your vendors if they accept more efficient payment options, such as a purchasing card, which will allow you to pay vendors faster, thereby improving your cash flow and freeing up working capital. Corporate cards can also earn you rewards that can help you save on other line items in your budget.
REVISITING YOUR OPTIONS
Not surprisingly, a lot of transition strategies have changed over the past few months. That should lead to asking yourself a few questions about your current plan. If you were considering ownership transition prior to March, for example, what was your plan for the next step? Was it handing off the business to the next generation? Given the current situation, would it be better to take a dividend payout instead? If you go this route, you’ll have to consider how much COVID-19 has impacted your financial performance. That could adversely impact the dividend you’ll receive. In the current environment, would it be better to take a dividend payout in three years instead of next year? If you expect earnings to increase after the effects of the pandemic have subsided, it may pay off to wait.
Maybe you were considering an outright sale of the business, or an acquisition to fuel growth. If so, do you have the right contacts in place? Do you have an idea of what type of acquisition target is right for your operation? Also, if your earnings were impacted by COVID-19, that will likely cut into the multiple you’ll receive in a sale.
While there’s still a lot of uncertainty, there are steps you can take on the operational side that can help determine how to proceed with your transition plan.
CHARTING A NEW PATH
Is what you’re doing today getting you where you want to go?
With the changes brought on by COVID-19, it’s important to reevaluate your current state. That means being creative and open to new ideas. What you had been doing before March may no longer be the best path to get where you want to be.
The ongoing uncertainty still has many organizations in survival mode. But the changing business dynamics means it could be the right time to take a fresh look at where you are in your strategic plan.
Don’t let the current environment distract you from the fact that you need to stick to your plan, and make sure that what you’re doing in your day-to-day operation is setting you up for where you want to take your business.
Tom Jennings is the Southern California Market Executive for BMO Harris Bank. He can be reached at (310) 804-8076 or via email at firstname.lastname@example.org
The material contained in this article is intended as a general market commentary. The opinions, estimates and projections, if any, contained in this article are those of the author and may differ from those of other BMO Harris Bank employees and affiliates. BMO Harris Bank endeavors to ensure that the contents have been compiled or derived from sources that it believes to be reliable and which it believes contain information and opinions which are accurate and complete. However, the author and BMO Harris Bank take no responsibility for any errors or omissions and do not guarantee its accuracy or completeness. This article is for informational purposes only.
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