Time to start that fund for a rainy day
I operate a small manufacturing business and have been doing extremely well during the past four years. I keep hearing comments about a recession, and since I've never been in business during one, I'm wondering if there is anything I should do to increase my chances of coming through it OK?
Yes, it's time for a reality check.
Business hasn't always been this good and many of our financial wizards are predicting a recession, only no one has specified the date. They are undoubtedly right, but the date is unclear.
Here are some suggestions on what you can do to increase your chances of weathering a business slow down:
- Use today's profits to create tomorrow's rainy day fund. Ask your accountant how or if you should hold some of your profits and what type of account that should be - personal account, money market or company account.
- At your bank, apply for a line of credit now - when your business is doing well. Banks love to lend money when least need it. That time appears to be now. This line of credit is for short-term borrowing when you have a temporary cash flow shortfall.
Monitor specific economic indicators that can alert you to an oncoming downturn. These might be reports from your customers that their business is slowing, layoffs at your customers', customers lengthening their delivery times or stock market changes.
- Stay in touch with others in your community and in associated businesses. Periodically ask suppliers, subs, bankers, and accountants what they forecast for the economic future.
- Develop a healthy backlog of work. Every month, track how much gross profit you have remaining in work in progress, not sold and not started.
If you have five to six times your monthly overhead and net profit covered, you can be fairly confident that you have sufficient time to take appropriate action when the downturn approaches.
- Don't get lax on collections. It's easy to do when there's enough money in the bank and things are going well. But one of the first signs of a downturn is slower client payments.
You won't know accounts receivable is amiss if you don't keep a tight policy. So stay alert.
- Watch out for overhead bloat. Any extra long-term overhead, new machinery, additional personnel, or building addition will come back to haunt you when the money is tight and monthly overhead is high.
- Develop accurate financial reports, produced on time. If you aren't sure which ones or which number to watch, get your accountant involved and get educated. This may even involve developing additional or new reports that are indicative of any change.
Today might be the perfect time for you to gather your financial data, closet yourself in your office and see how prepared you are for the inevitable downturn. After all, it's just around the corner. If we only knew which corner.
Bill Bryan is a counselor with the Service Corps of Retired Executives. SCORE offers counseling, workshops and seminars on small business operations. You can reach Bryan through SCORE, 515 N Court St. 815-962-0122, for information and appointments.
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