I’ve written about this topic before. We all want to take advantage of good times, such as those we’ve been experiencing for the last several years, while preparing for the next downturn, which will inevitably come.
Most of my clients have had increased revenues in every year from 2012 through 2015. In fact, many were up 50 to 100 percent in sales over that period. A few doubled or tripled revenue. That’s a mark of good times and we love it! And while our memories of unpleasant experiences are short, the Great Recession that started in 2008 was recent enough and traumatic enough that people have not forgotten.
We all know that a downturn is coming. The tough part is calling the specific time. For several years I’ve been saying it would be 2017. During 2015, it was looking like (and many were predicting) that the next recession would start further out; maybe 2018 or 2019.
But with the dismal start to 2016, at least in global economic terms, I’m wondering whether 2016 will be the start of the recession rather than 2017. Locally we’re enjoying a boom but we’re not immune to worldwide conditions. Time will tell.
Meanwhile, what can be done to prepare for that eventual downturn without missing out on the good times? My advice is to remain watchful and vigilant by taking the following actions:
1. Do an SRO Budget each year. Your Realistic budget is good discipline but also do a Survival budget and an Optimistic budget. The Survival budget is what you would do to get through hard times.
2. Monitor your financial performance monthly. Watch for signs of a downturn. Monitor trends When the downturn comes, we always wish we would have reacted more quickly.
3. Use debt prudently. Typically don’t borrow more than 75 to 80 percent on any long-term asset. When lenders start offering 100 percent loans, that’s a bad sign.
4. Don’t be afraid to turn away business. If you don’t have the capacity to accommodate all the business available to you, that’s okay. Prioritize what business you will take by profitability rather than revenue.
5. Make a long-term plan. This gives you context for your annual planning. When making long-term plans, assume there will be one recession per decade. Your plan may even include using the downturns as an opportunity to acquire a competitor or the competitor’s customers.
6. Have an Objective Adviser. Having a trusted financial adviser who you trust and who is not emotionally invested in your business can help make the hard calls. Listen to their advice. When they say you should be laying off staff, you probably should do just that.
These points won’t help you predict the next downturn. But they will help you recognize it sooner and allow you to weather the storm.
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