You'd normally expect a luxury homebuilder to be hit hard by a recession. But when the bottom dropped out of the economy in 2008, Victoria-based Abstract Developments Inc. didn't just survive, it thrived, registering continued growth of about 5% per year.
Fortunately, says the company's owner and president, Mike Miller, Abstract Developments was agile enough to switch gears and take advantage of a still burgeoning market for building luxury custom homes. In addition, he says, "We went back to our roots and worked a little harder and a little smarter."
Want to ensure that your own business survives the next economic downturn? Check our recession-buster checklist to see how your company fares:
We're operating efficiently.
Apart from tracking revenue and profits closely, a company's trading ratio (sales over working capital) is a good measure of productivity, according to chartered accountant (CA) Ian Schofield, a partner with accounting firm MNP LLP and senior VP of MNP LPD in Regina. A healthy business generally has a trading ratio of 8 to 10, but the figure may vary for your industry. If that number rises too high, you may not have enough working capital to support sales growth or to pay off short-term debt.
"With a trading ratio at 30, you only have a cushion of about 10 days to operate if there's a problem," says Schofield. But a trading ratio of 2 means you're probably not turning inventory over quickly enough. "You should be asking yourself what you can do to get things back on track" by discounting product or ordering less inventory, notes Schofield.
Our collection policies are tight.
Staying on top of billing and receivables is crucial for the recession-ready company, says Schofield. An ideal Days Sales Outstanding (DSO) would be 30 days or less, depending on the industry.
Think your DSO isn't important in today's low-interest rate environment? Consider that a business with $12 million in sales that collects its receivables in 45 days will have about $1.48 million in accounts receivable. Delay collection by just one week (to 52 days) and the amount of outstanding receivables will grow to $1.7 million. Even at a 3% interest rate, it will cost you an extra $6,000 to finance. More important, you'll have $200,000 less cash flow to pay employees or buy supplies.
We're on top of delinquent clients.
"If your receivables start slipping past 90 days, you have a real problem," says Schofield, "because you're not collecting from your customers and the bank won't loan you money against those receivables, either."
It pays to have someone systematically following up on accounts that are past due by a predetermined number of days and keeping notes on his or her client interactions, advises Sunil Mistry, a CA and partner with KPMG in Toronto. A good practice is to run an "aged receivables" report from your accounting system on a weekly basis, paying special attention to receivables that are overdue by 20 or 30 days. "Call delinquent clients if possible," says Mistry. "It's generally much more effective than email or letters, and you're more apt to retain a good client relationship."
We have the best possible deals with suppliers.
Depending on your needs, there are two things you should consider discussing with suppliers, says Mistry: price and terms. You might be able to ink a bulk buying discount, for example, or secure price reductions of 1% or 2% by agreeing to pay within a set time (perhaps within 30 days after invoicing).
If you have cash-flow concerns, focus on negotiating longer payment terms or a good return policy (if applicable). "You need to revisit your supplier arrangements every couple of years to make sure that you're getting what you need and paying the going market rate," says Mistry.
We've maximized our margins.
You don't want to raise prices while in the depths of a recession. But, on the other hand, if your margins are too slim, you may not survive. "You need to know what your competitors are charging and what the market will bear," says Schofield. That means obtaining comparative data on your industry.
"One of my audit partners sent me a client who was in trouble," explains Schofield. "It was a bakery, and partway through the interview I asked, 'Well, can you not raise your prices?'" The client was hesitant but agreed to give it a try. "They called me back a week later and said they were charging an extra 10¢ a loaf and they hadn't lost a single customer," he says. "It meant the difference between being in the red or in the black."
Our workforce is flexible.
As full-time staff have retired or left Mississauga, Ont.-based EasyHome Ltd. over the past few years, the company has been replacing them with part-timers, who have grown from about 2% to 10% of the workforce. "Not only does that save in terms of benefits," says David Ingram, president and CEO of the rent-to-own home-furnishing business, "but we're able to make the hours work so we have people available during the times of day, month and year when we're busiest."
Other techniques for getting the skills you need without taking on the expense and commitment of full-timers include using freelancers, consultants and contract workers, says Mistry. Your contingency workforce should comprise somewhere between 5% and 25% of your total staff. Just keep close tabs on costs to ensure you're not overspending on external sources instead of hiring someone in-house.
We have a diverse customer base.
Every business is different, says Schofield, "but [a B2B company] should have a minimum of 10 customers accounting for 80% of its revenue, with none responsible for more than 10% or less than 3%." A company that is diversified geographically or by industry, market segment or product is less vulnerable, adds Mistry. It's the business equivalent of not putting all your eggs in one basket.
Before 2008, about 75% of Miller's business had come from new-home development projects in the Victoria area. But when the downturn hit, he says, "people just froze and decided to scale back and spend the money on their own house rather than buy a new house." Miller responded immediately by ramping up the luxury custom home-building segment of his business from about 25% to 60%. "That market seems to be less vulnerable to the economy."
We have a reserve cash fund.
If all else fails, having a substantial pool of money set aside for a rainy day can help. Aim to put away three to six months of operating cash flow by tightening operations and preemptively cutting costs.
"In a downturn, cash reserves make you more recession proof if your sales go down by allowing you to pay your people," says Mistry. Reserves can also be used to expand your business in good times and bad. "Companies that are able to weather the storm often are the first to start buying equipment and companies because they are the ones that manage to survive."