The manufacturing industry has enjoyed prosperity for several years, however, no business is recession-proof. While times are good, proactive owners should take steps to prepare for inevitable downturns in financial performance. The following are five strategies to consider:
- Monitor cash flow. Reinforce your cash flow management practices now. Plan your cash flow three to six months out, and prepare cost cutting methods or implement other measures in advance for the first sign of a shortfall. To predict revenue decreases’ impact on your operating cash flows, it may be helpful to run simulations.
In addition, review your payment terms with suppliers and customers. The time to make changes is now, rather than during an economic downturn. Other strategies to enhance your cash conversion cycles include implementing real-time billing practices, offering early-bird discounts for paying within 30 days and facilitating online bill payment for customers.
- Manage debt. Don’t wait until you’re strapped for cash; negotiate with lenders from a position of strength. Apply for lines of credit or increase your existing credit lines for ready access to working capital when you need it. Also, to help your business weather the next recession, consider paying down debt during prosperous times.
- Create flexibility. To scale down costs quickly when necessary, build flexibility into your operations. Possible strategies include:
- Increasing overtime rather than hiring new employees
- Using independent contractors for cyclical or seasonal work
- Outsourcing noncore functions
- Leasing rather than owning equipment and facilities
These techniques essentially convert fixed costs into variable costs, enabling you to react immediately to changing economic circumstances.
- Strengthen your supply chain. To help you stay informed about market developments maintain your product supply, develop strong relationships with your suppliers and vendors. Consider entering into long-term contracts to ensure a steady material flow.
- Invest in smart, consistent marketing campaigns. You need marketing the most during a recession. After all, it’s more important than ever to get the word out about your products and services since you and your competitors will be vying for the same shrinking pool of consumer demand. Thus, making cost-effective marketing decisions is also crucial. For example, depending on your target market, direct mail advertisements and catalogs may be more expensive (and less effective) than social media campaigns and online catalogs that can be updated based on market conditions.
These five possible steps can help proactive owners prepare for economic downturns that may be on the horizon. Not sure where to start? Contact us to learn how your company can minimize the adverse effects of a decline.
Weaver conducted our second annual manufacturing and distribution market outlook survey. Our goal was the same as last year: to collect…