At Third Road Management we have the honor of working with businesses and non-profits across a spectrum of industries, ownership structures, tenure and financial status. Through our experience we have gathered some wisdom that can hopefully be helpful to business leaders outside of our current network of clients. This is our venue to share some of our ideas.
The current market environment feels like one of those times that we’re going to look back on in a year or two and say: “Well, the signs of an over ripened market were obvious. I can’t believe we didn’t see it sooner.” While I’m not, per se, an economist, some of these signs seem to be screaming at us. The DJIA is hovering around 35,000. Signals of inflation are going off. Interest rates are extraordinarily low. Homes are selling above list price with numerous offers the day they are listed. Lumber prices are insane. Lead times for appliance and furniture purchases are several months out. Car dealerships can’t keep enough cars on the lot. Baseball and Pokemon card prices are skyrocketing. Oh, and all of this is in the context of a global pandemic that isn’t quite over yet. You get the idea.
That all being said, it doesn’t seem like the run is going to be over today or even in 2021, does it? So, I’ve been thinking through this question: “What are some ideas for businesses to continue to play offense while positioning themselves to be able to switch quickly to defense in the event of a market correction?” I think that this an important question to explore now as usually by the time that a correction is obvious, it’s too late.
Here are some ideas that businesses can do now to both ride the current wave AND be prepared should a market downturn manifest:
- Financial Modeling Scenario Planning: We always recommend having great forecasting models, but in this specific context, in addition to being able to model growth, run some scenarios that call for a 5%, 10%, 20% or 30% reduction in the top line for 1 or 2 years. Focus on whatever scenarios are reasonable to prepare for. What would happen to the company’s profitability? What are the plans that you can write now to prepare for any one of those scenarios should they happen to right size your cost structure? Having your plans done now would ensure your ability to move swiftly and decisively later.
- Working Capital Management: The best time to tighten up your working capital policies and procedures are when things are going well. Document and enforce your credit and collection policies. Negotiate more favorable payment terms with vendors. Shop your working capital line of credit around while rates are low and terms are loose. Keep controls on inventory very tight to ensure you don’t end up with excess inventory.
- Keep Costs Variable: To the extent possible, try to keep costs variable. Outsource what doesn’t need to be done internally. Hire temporary labor if needed. Be leery of signing any long-term contracts that do not have reasonable out clauses and review existing contracts to know which ones you can get out of should you need to.
- Review Cash Managment Policies: If your organization maintains a certain range of number of months of cash on hand, for example 2-4 months of operating expenses, it might be worth developing a plan to move towards the outer end of that range to ensure adequate liquidity during a transition period.
This list is not exhaustive but it’s a start, and is a challenging but worthwhile exercise. You’ll want to continue to take advantage of a strong market, and also be prepared for the downside. Like everything with owning and running a business, it’s not easy, but it’s better to be ahead of the game. As the saying goes “prior preparation prevents poor performance.”
At Third Road Management our expertise lies in everything helping you lead strategically, financially and operationally, so if you need any help always feel free to contact us at email@example.com for a no-obligation or initial cost consultation.