The credit crunch is rapidly making its way from Wall Street to Main Street and squeezing businesses across a wide swath of industries. Slowing growth, weakening demand and reduced lending by banks compound an already difficult environment in which key commodity prices are rising rapidly.
While the food industry may prove more resilient than others, our general advice to clients is to take proactive steps to prepare for potentially challenging days ahead. Following is a 10-point checklist of things to consider as you manage through this difficult time – distilled from a much longer pamphlet from Grant Thornton LLP. With careful planning and foresight, you might even be able to turn conditions to your advantage. Businesses that are well capitalized, well positioned and well managed should find opportunities.
1. Cash is king: If you have cash on your balance sheet, you have a greater degree of flexibility in your decision-making. Cash is the lifeblood of any business, and it matters more than earnings. As the saying goes, “Profits are an opinion, but cash is a fact.” More and more, bankers, investors and advisory professionals focus on the often-ignored cash flow statement. If earnings are growing faster than cash flows, red flags are raised.
2. Be relentless on cost control: In order to maintain your current or historic levels of profitability in an environment characterized by decreasing demand and increasing commodity prices, you will almost certainly need to cut costs and spending where possible. Escalating costs will cause margin compression and in turn put pressure on liquidity. Tough economic conditions require a razor-sharp focus on cost containment at a minimum, and on cost cutting where possible.
3. Evaluate customers and suppliers: The recent challenges in credit markets, as well as a general economic downturn, have put increased pressure on the purchasing power and creditworthiness of customers resulting in a tightening of credit terms and product availability from suppliers. Ask yourself a simple question: If your customer were to file for bankruptcy tomorrow, what would the effect be on your business?
4. Get smarter on taxes: It is important to take appropriate advantage of the opportunities available to reduce your tax liabilities, such as fully utilizing available credits and deductions and making the least allowable estimated tax payment. If a company operates across multiple state and local jurisdictions, there are many opportunities to manage cash and reduce taxes in the sales and use taxes and property tax arenas.
5. Reconsider capital investment plans: Investing in new assets in a downturn can bleed you of cash when you need it most. Carefully consider your capital investment plans, and question the proposed value and timing. If it isn’t mission-critical, consider delaying or deferring it.
6. Get closer to your banks: Given the current state of the credit markets, banks will be a lot more cautious and concerned about credit quality. As a result, they will need greater persuasion to lend you money when you need it. Borrowing will likely come at a higher price, both in terms of interest rates and fees, and will almost certainly include more restrictive covenants and require increased monitoring and transparency.
7. Consider your financing options: Having issues with your bank (either due to your problems or their problems) can result in a severe restriction in your borrowing capacity, or worse, pulling your financing facilities altogether. With what’s happened in the financing environment, it’s not as easy as it used to be to simply secure an alternative source of capital. Make sure you understand all your options for funding your business.
8. Keep an eye out for bargains: As lending markets contract, some companies will have liquidity problems. A number of these companies will consider a sale transaction as a viable option. It could be a need to preserve personal wealth, the real or perceived lack of alternatives or a lack of confidence in a recovery. This feeling of uncertainty will drive many shareholders to seek an exit or a partnership with a strategic investor rather than hunkering down and trying to weather the storm independently, thus creating buying opportunities at depressed prices.
9. Protect your personal wealth: In our current economic environment, it is likely that businesses will have greater borrowing needs. In this environment, banks will want more security in the form of personal guarantees, additional collateral and more stringent debt covenants, even on existing loans. Solving business cash needs with personal assets will reduce the diversification of your overall personal net worth and further expose you to a long-term recessionary economy.
10. Worst-case scenario: You’ve taken a hard look at your business and stress-tested sales assumptions, but your fixed costs are such that even breakeven cash flows are based on certain levels of revenue. Your future is uncertain, and trade credit is contracting. Maybe a debt payment is due. Don’t panic. The credit crisis and economic downturn are impacting businesses across almost every industry, so you’re not alone. Carefully consider alternatives. What are the advantages and disadvantages of restructuring through a bankruptcy? Does a sale of all or part of the business make sense? Is raising equity an option? What is the enterprise value of the business, and is that value greater than the face value of secured debt? How do you determine the value of all or part of the business? In a financial restructuring, the critical issue is indicative value.