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Major downturn not likely but best to prepare anyway

I’m no Cassandra.  I’m a realist who started his career in the mid-1980s and has experienced many economic cycles.  The recent divergence between the economy’s performance and markets around the world reminded me of a column I wrote for the photonics cluster in early 2018.  It was prescient then and this adapted version may be helpful now.

I don’t believe we will have a major downturn in the foreseeable future, but I have enough practical business experience to know this is a good time to take precautionary measures.  In a sense, make a trip to Wegmans and Home Depot to stock up on water, candles and other supplies in case the storm hits.

As a venture capitalist, I experienced two severe downturns — the credit crisis in 1990-91 and the dot-com/telecom meltdown during 2001-02. My advice is derived from firsthand encounters that were costly and painful.

It is always preferable to prepare beforehand by assuming that your company will experience a decline in sales. Review your 2019 budget and run several new scenarios assuming a 10 percent and 25 percent revenue shortfall. In each case, determine how you will pare back costs (or defer them) in order to assure your long-term viability.  Be prepared to implement the changes when you start experiencing revenue shortfalls.

A cautionary word: treat client relationships as the family jewels.  Cutbacks that will have a direct impact upon the client experience should be avoided if possible.  That means areas like new product development and training should be targeted first.

Consider postponing any long-term commitments or investments if possible.  If you’ve been contemplating a move to a larger, more costly facility and are in a position to postpone that decision, you may be best served by hanging tight.  Not only will you preserve cash, you may benefit if the real estate market softens. That holds true for certain capital and IT purchases, too.

Consider what you will do if you face a major reduction in cash flow. Where are your alternative capital sources in a moment of need? Remember, the economy is cyclical. So, there will be an upturn after a downturn. How are you going to have enough cash to make it through the downturn? In the event you need additional liquidity, do you have a line of credit? What are your borrowing sources? Do your investors have the ability to fund the company? Can you self-fund?

There are some traditional and creative sources of capital to get you through this. Banks fall into the former category. Make sure your banking relationship is in good order. Have you been in regular contact with your loan officer sharing reliable financial information? Have you had conversations with your investors about how they might support you in a pinch?

Running a company is among the most demanding and rewarding pursuits — other than raising a child.  It is management’s responsibility to plan for the future and abide by the parental advice that “an ounce of prevention is worth a pound of cure.”

Richard A. Glaser is the founder of RocGrowth, a community platform supporting entrepreneurship and innovation.

 

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