The Key to Doing Good in a Bad Economy? Cash Flow

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I've been in business for 30 years and have lived through three or four recessions. It's easy to tell people, "Keep spending." But that's not always the right call. How do you know when to spend?

Here's my observation: When the economy goes bad, companies start to pay attention to things they should have looked at before. I think you have to take into consideration how the economy is affecting your business and start thinking short-run instead of long-run. For instance, maybe renovating your building will have a good payback over the next ten years but the cash flow will put you in a bad spot. Maybe you hold off a year.

On the other hand, buying a labor saving machine might be a good purchase because you can finance it and the payments will be less than the savings. The knee-jerk reaction of "stop spending money" can be very dangerous. It can hurt more than the recession itself. People start making bad decisions like downgrading their service or quality. That can have long-term and short-term consequences.

The key is to watch your cash flow carefully. Failing to do so can put you out of business. Profits are going to be down either way, but you can pick up some of that ground next year. There can be a huge difference between cash flow and profits depending on your bank debt, receivables, and inventory. Recessions can actually have a positive effect on your business long-term. It can shake out competitors to leave you a bigger piece of a smaller pie. I've read numerous articles about companies that didn't pull back during recessions and got a tremendous reward afterwards.