Finance

The best time to prepare for the next recession is now

When Texas went through an economic downturn in the 1980s, Tom Yantis learned some hard lessons in business management. "If I needed to boil it down to one sentence, it would be this: People act differently during a recession than you would ever expect," observes the president of Yantis Corp., a $26-million construction company in San Antonio. "It's not really their fault. It's your fault for failing to take steps to anticipate what might happen in the worst of all situations."

As the economy weakened, one of Yantis's best customers, a man "whose word had been as good as gold for us for more than 10 years," began to lag behind on his multimillion-dollar payments. The customer assured Yantis that money was coming in soon and that the company's financing was secure. "I didn't check that out, because I'd never needed to check anything he told me for all those years," Yantis recalls. "When he wound up unable to pay me, I had only myself to blame."

Don't wait for a recession to improve your financial management. During a prolonged economic recovery, it's all too easy to get sloppy about issues like collection or cost control. Why not set aside an hour now to evaluate the strengths and weaknesses of your company's core financial systems? Then you'll have the best of both worlds. Should the economy slow anytime soon, you'll be prepared to handle reluctant bankers, late-paying customers, problem-plagued vendors, and other recessionary risks. If, instead, the good times just keep rolling, you'll know you've strengthened your company's financial foundation and positioned it for ever-more-profitable growth.

FOCUS YOUR COMPANY'S CHECKUP ON THESE KEY AREAS

Credit and Receivables
If you do nothing else, make certain that your credit-and-collection system is operating at peak efficiency. The reason: your customers' payments will inevitably slow down in any period of economic difficulty. You need a collection system that can identify problems early.

Yantis, for one, gives customers plenty of incentive to pay promptly. "When times are good, we try to build relationships with our major customers that encourage them to make early payments--mainly by offering them very attractive discounts for payments up front," he says. "If they'd have to pay annual financing terms of 12%, we'd calculate our discount at 18% annually or maybe even more."

If your discounts are attractive enough, they can function as an early-warning system. If a customer doesn't take an appealing discount, you may want to examine the account more closely. Ralph Anderson, a tax partner at M.R. Weiser & Co. LLP, an accounting firm with offices in New York City and Edison, N.J., advises all his clients to offer such early-payment discounts. When customers don't take the discount, he says, "don't wait longer than 30 days for payment before you get on the phone and call to figure out what's going wrong. That's the way to minimize your company's exposure" to risk.

Payables
To Fran Greene, the founder and president of Sun State Electronics Inc., in Winter Springs, Fla., strong vendor relationships are the key to growth regardless of economic conditions. "Your cash flow is a circle, and you've got to keep everybody in the circle informed--especially your vendors," she says. She makes sure that vendors understand that Sun State sells to large, slower-paying government agencies and so ends up with a 60-day collection cycle. "Now, we could pretend to our vendors that we'll pay them in 30 days, but in many cases, that's not a possibility. So instead, we're honest with them up front, and that way, we build credibility--which is completely essential to do when times are good," Greene explains. "Then, if something goes wrong at some point, and we need to stretch out our own payments a little longer, we don't wind up looking like a bad guy, because the vendors already know and understand our company."

A good rule of thumb: Make certain your company pays bills as smoothly as it collects them. Track your outstanding obligations on a weekly basis. Just as you need a collection plan to deal with customers' problems, you need a plan to respond to unexpected spikes in your own accounts-payable obligations.

Jeffrey Levine, an accountant in Newton, Mass., also recommends comparison-shopping among major vendor accounts "at least every couple of years." Too often, he notes, growing companies "don't pay enough attention to cost control until they hit a cash-flow crisis." Smart companies, he argues, should regularly reevaluate important vendor relationships. "Wait for a slowdown," Levine warns, "and you'll find you've got less room to maneuver."

Budgeting and Cost Control
If there's one piece of advice John Evans, the deputy director of Arthur Andersen's Enterprise Group, has for growing companies, it's to plan for all possibilities. "Just as you plan for growth and expansion, you need to forecast for problems," he says. Evans recommends planning for two unpleasant scenarios: "One, the worst case you can imagine--something like, 'I have only half the business I have today'--and one a more moderate set of problems."

Once you've fixed your imagination on those problems, figure out how you'd respond. "It's really a very basic matter of analyzing your fixed and variable costs and figuring out where you could cut down on expenditures to keep the company going in a survival situation," says Evans. You don't have to act on the plan; after all, too many cutbacks by companies could send the economy into a recession by default. But you'll undoubtedly be able to view potential savings more clearly when there's no crisis at hand.

There's an added benefit from such contingency planning: you may come up with some cuts that can easily be made now to free up cash for growth-related activities. Levine notes, "In a recession the company with cash is the one that can grow by taking advantage of other companies' problems."

Banking and Cash Management
If you don't devote attention to your banking relationships when times are good, you'll have sabotaged your prospects should the economy weaken. "You are not going to get a bank to work with you," Greene emphasizes, "if you wait until cash-flow problems hit. These are relationships you have to think about and work on all the time, especially when you don't need to depend on them." Greene's strategy is to maintain close relations with two banks: one handles the company's payroll, and the other all its other banking needs. She visits and calls them regularly, often just to keep the banks up-to-date on company developments. "My goal is to shelter ourselves with two healthy relationships, just in case either one of them needs to pull back at a point when we need them most."

One final self-test worth taking: Is your company's cash-management system helping or hurting cash flow? Yantis prides himself on an arrangement he's set up with his bank. "Besides keeping spare funds in completely liquid investments, such as a money-market account, we also worked with our banker to prechoose some stock-market investments that also fit our profile as a conservative investor," he explains. "Now any funds we can spare above liquid investments get swept into those stocks. It's another way of generating revenues for the business." And that, after all, is what growing a company is all about--in good times and bad.

Jill Andresky Fraser is Inc.' s finance editor.


Now what? Are You Too Fat and Happy?

Has your company gotten perilously sloppy? Here are three warning signs:

  1. You couldn't find the documentation for a juicy travel-and-entertainment or equipment tax write-off, so you just decided to skip the deduction. After all, last year's results were so strong that you didn't really need it.

    THE DANGER: Sloppy record keeping and inadequate tax planning will damage your bottom line no matter how the economy is doing.

  2. Your banker asked for detailed information about a financial ratio such as your break-even point, and you were clueless. Since your company is profitable, you don't worry about such technicalities.

    THE DANGER: Poor understanding of your company's financial underpinnings will make it impossible for you to price competitively and manage cash flow in tougher economic conditions.

  3. Your company's been growing so fast that you don't really have time to track things like accounts receivable and cash flow on a weekly basis. You've always worried that the reports would just slow things down.

    THE DANGER: A lack of timely, comprehensive financial reports delays a manager's ability to detect and respond to incipient problems.


Resources

JOHN EVANS, Arthur Andersen, 1345 Ave. of the Americas, New York, NY 10105; 212-708-3972; john.n.evans@arthurandersen.com 119

JEFFREY LEVINE, Alkon & Levine PC, 29 Crafts St., Newton, MA 02160; 617-969-6630 119

M.R. WEISER & CO., Ralph Anderson, 399 Thornall Ave., Edison, NJ 08837; 908-549-2800; randerson@mrweiser.com 119

SUN STATE ELECTRONICS, Fran Greene, P.O. Box 195475, Winter Springs, FL 32719; 407-327-8000 119

YANTIS CORP., Tom Yantis, P.O. Box 17045, San Antonio, TX 78217-0045; 210-655-3780 119