Diversification and financial management are key strategies

The recession of 2008-09 may have occurred nearly a decade ago, but it’s still a painful memory for many entrepreneurs. More recently, the decline in oil prices has caused a slowdown in producing regions that have hurt business owners.

Unfortunately, economic downturns are a fact of life when you’re running a business. But there are steps you can take now to prepare your business to weather a storm and emerge even stronger.

Entrepreneurs often know they should be prepared for tough times, but they don’t always take the necessary steps.

Here are five ways you can recession-proof your company.

1. Grow your customer base

It’s hard to overemphasize the importance of increasing the number of customers you have. According to a recent study, nearly one in six well-established businesses had encountered financial difficulty because of losing a single client. Very often, businesses are not prepared to deal with the unexpected loss of their biggest client or contract.

2. Focus on your finances

Solid financial management is vital for ensuring your company is ready to weather an economic downturn. Entrepreneurs need to have early warning systems to let them know when trouble is brewing. The numbers tell you the truth about your business and you need to embrace them.

Consider setting up a cash flow planner. To do so, use a spreadsheet to record projected revenues and expenses for the next 13 weeks and then update it each week. This allows you to get a handle on when payments from customers are expected versus when suppliers must be paid. You can then plan for periods of tight cash flow, coming projects and financing needs.

Consider setting up a financial dashboard, showing four or five key performance indicators on the financial health of your business.

3. Offer new products and services

It’s easy for business owners to get comfortable with the products or services that have been successful for them in the past. However, broadening your line-up may be the key to surviving during the next recession.

In fact, you may not even have to come up with something completely new. Instead, you might be able to repurpose your products for another market. For example, manufactured products used in the oil and gas sector could be effective in other areas with just a few changes. Research showed that having a range of products and service lines can be an important form of diversification.

4. Expand internationally

International expansion is another great way to diversify your business. If your sales dip in Canada, you may be able to make up the shortfall in markets with stronger growth.

Exporting opens up a lot of opportunities. Canada has cultural and economic ties with the U.S. and Western Europe, and our small and mid-sized businesses can often be very successful there. Those markets, in turn, can be a launching pad to higher-growth emerging markets.

5. Stress-test your business

As the last recession proved, some circumstances simply can’t be foreseen.

That’s why it’s important to run through various scenarios now, including how you’d handle a sharp drop in sales. While you’re at it, look at different crisis and disaster scenarios and put contingency plans in place to deal with them.

Look at things like: What happens if our input prices rise because of the weaker dollar. What if key people in your business were all of a sudden unable to come to work because of illness or a natural disaster? Unexpected developments can derail businesses.

Lessons learned

• Innovation counts—Successful businesses offer new products and services often and quickly adopt new technology.
• Get help—Networking, hiring consultants and setting up an advisory board are ways successful businesses get external advice.
• Map it out—Developing a strategic plan with specific targets will help to keep your business on track even as economic conditions change.
• Master financial management—Keeping tabs on your finances allows you to plan better, see trouble brewing and react quickly.

Use this tool to improve your strategic planning

An analysis of your company’s strengths and weaknesses should be a key component of your strategic planning process. This easy-to-use tool also identifies your company’s opportunities and any threats it faces (hence the term “SWOT”).

This analysis helps you see how you stand out in the marketplace; how you can grow as a business; and where you are vulnerable. The process takes into account both internal and external factors your company must navigate.

Address issues in your planning

Don’t make the mistake of preparing a SWOT analysis and then ignoring it as you develop your strategic plan. Instead, your plan should include concrete steps to harness your company’s strengths in order to target the opportunities identified in your analysis. The plan should also include specific measures to address the weaknesses and threats you face.

Here are more details on the four elements in a SWOT analysis.

1. Strengths

Make a list of your company’s internal strengths. These are any competitive advantage, skill, proficiency, experience, talent or other internal factors that improve your company’s position in the marketplace and can’t be easily copied.

Examples include solid financing, a superior brand, valuable intellectual property, superior technology, modern equipment and/or machinery, a well-trained sales team, low staff turnover, management expertise, operational efficiency, high customer retention, good supplier relationships, etc.

2. Weaknesses

These are the factors that reduce your company’s ability to achieve its objectives. Examples include unreliable suppliers, outdated equipment and/or machinery, insufficient marketing efforts, lack of financing, management weaknesses, gaps in expertise, etc.

Be as honest as you can when identifying these deficiencies. Ignoring weaknesses means you can’t make decisions that will strengthen your company.

3. Opportunities

Opportunities are external factors that allow your business to grow and be more profitable. Examples would include new potential markets; innovations; technological advances; consumer trends; support from governments, the community or business partners; etc.

One way to identify your opportunities is to closely analyze your competitors’ weaknesses.

4. Threats

Threats are external obstacles your business must overcome. Threats may include a declining economy, a consumer shift to other products, technological change, a labour shortage, community opposition, legal or regulatory changes, etc.

It’s often useful to take a close look at your competitors’ strengths to identify external threats to your company. Again, be as honest as possible.

A SWOT analysis doesn’t have to be a long, complex document. Two or three pages of point-form notes are usually sufficient. Free templates for a SWOT analysis are easy to find on the Internet.

You can put your SWOT analysis findings in the table provided below:

It’s worth revisiting your SWOT analysis at least on an annual basis, particularly when you review your strategic plan.

Financial projections will help you anticipate your cash flow needs

It’s the start of a new year, and you’ve got big plans for your company—an expansion or a major equipment purchase.

How will your plans affect your cash flow? Will you need financing, and if so how much?

These are typical questions to ask as part of your company’s annual financial planning.

Many neglect financial projections

But a surprising number of entrepreneurs fail to make financial projections for their company. And the result can be serious, unexpected trouble.

Making cash flow and other financial projections each year is a vital tool for keeping your business healthy and on a sustainable growth path.

The idea is to have a reference you can review through the year, so you can make adjustments as needed. Without this, you’re basically leaving everything up to chance.

How to make financial projections

Here are five steps to creating and using financial projections to guide your business.

1. Plan your year

First, think about what you want to accomplish over the next 12 months. This should be based on your strategic plan for your business.

With a clear idea of what you want to achieve, start estimating your annual expenses and consider the additional costs you will incur to implement your business strategy. These expenses should be added to the costs of running your day-to-day business, such as:

• payroll
• rent
• utilities
• interest
• loan repayments

Also, be sure to consider anticipated big-ticket items, such as buying a new truck, redesigning your website or updating your computers.

Next, estimate your annual sales and think about the effect your decisions will have on your cash flow forecast. Make sure you take into consideration your credit policy and when your customers pay to ensure your business has enough cash throughout its business year.

2. Make projections

Based on past experience and your plans for the coming year, prepare these three documents.

• A projected income (profit-loss) statement—Projected revenues, costs, expenses, taxes, etc.
• A projected balance sheet—Assets, liabilities, equity.
• Monthly cash-flow projections—Accounts receivable, accounts payable, investments, financing, etc.

It’s helpful to have different projected scenarios (optimistic, most likely and pessimistic) so that you can anticipate better the impact of each one.

3. Arrange financing

With your projections in hand, determine financing needs for the coming year and discuss them with your bankers and other financial partners.

The start of the year is a good time to arrange any needed credit lines or business loans. Working out your financing ahead of time improves your odds of getting approval and helps ensure the best terms.

If you come to your banker and tell them you need a $2 million loan next week, most probably he or she won’t be able to help you. Bankers don’t like surprises. They lend you money when you can show you understand what you’re doing.

Also, don’t make the common mistake of dipping into your working capital for long-term capital investments because you may end up facing a cash crunch. It’s better to use long-term financing for such projects.

4. Monitor and adjust

Finally, review your projections each month against the actual numbers to see if you’re on track. Variances can flag trouble spots in your business. Take an even closer look each quarter. Make any needed adjustments to your operations or changes in your planning.

5. Get help

Depending on your in-house resources, consider seeking outside help in creating your financial projections and monitoring your progress through the year.

Some entrepreneurs might not see the benefits of strategic planning or know how to proceed.

Here are answers to some of the most common questions and concerns raised by entrepreneurs about this important tool.

Question: My company is small. We don’t have a lot of money. Isn’t strategic planning just for bigger companies?

Answer: That’s a common misconception. All companies, large and small, can benefit from planning for the longer term. It can help you weather today’s challenging markets, diversify and proactively pursue the best opportunities.

Strategic planning doesn’t necessarily mean producing a big, highly detailed document. It can be done on a smaller scale at a reasonable cost for businesses of any size.

Question: How can I find time for strategic planning when I’m already swamped with the day-to-day business of running my company?

Answer: Taking the time to work on your business instead of in your business will pay big dividends, including helping you be less swamped day to day. A strategic plan can help you focus on important issues, make decisions, delegate, reduce errors and not waste so much time putting out fires.

Question: Won’t strategic planning cause a lot of disruption to my business?

Answer: Planning for your business may lead to changes in your company, but they will most likely be positive changes. The end result should be better decision making, wiser use of resources and improved growth and profit margins.

Also remember that change will happen anyway, regardless of whether you develop a business strategy. A plan will help you anticipate change and focus on the best opportunities, rather than reacting and letting change take you by surprise.

Question: How can I plan long term when the future is so uncertain and I have no idea what will happen next week, let alone several years out?

Answer: Planning is needed precisely because the future is uncertain. The information you have today can be used to make reasonable forecasts of what the future might hold. Thinking about the future helps us plan what to do in various scenarios so we can be more ready for whatever it brings.

Question: Everything is fine with my business, so why would I need a strategic plan?

Answer: It’s common for entrepreneurs to feel their business is doing great—until a sudden change takes place that disrupts or even imperils their company. Planning strategically can help you prepare for such changes and stop flying blind.

Question: Why should I do strategic planning when I already know I need to grow by investing more in sales and marketing?

Answer: Sales and marketing without the right strategy won’t necessarily bring you success. They could just increase your costs. And even if your sales go up, will you sell the optimal products at the best margins to the right customers? Will you have financing, operations, and distribution in place to handle the sales increase?

Question: Why do I need a plan when I already talk regularly about our business goals with my team?

Answer: Even if you discuss your goals internally, a strategic plan gives your entire team a clearly articulated line of sight to those goals.