About every seven years the economy slows and goes through a recession. Remember the 1990-91 recession, and the credit crunch and unemployment in its wake? Well, although we are not smart enough to predict the next recession, we can recognize telltale signs that a financial crises is brewing and has become more heated in recent months.

The global credit markets have literally evaporated and there are signs in the U.S. that we are feeling the effects: agricultural lending is tightening up, commercial office construction has been hard-hit, and capital spending is slowing. And, in a recent survey by the Federal Reserve Board, more than 20% of large banks that were surveyed reported a tightening of lending standards --- the highest level since the 1990-91 recession.

The Federal Reserve Board has been lowering interest rates in order to try to stave off a full-blown credit crunch. While for the moment, it appears as though these actions will avoid a recession, they are not a long-term answer. With inflation at modest levels, they may continue to reduce short-term interest rates. But in the final analysis, this only defers the inevitable and keeps the expansion alive for awhile.

The underlying fears of recession will probably slow the flow of credit, which will have a larger impact on second tier companies than on large corporations. Large corporations can endure a timing mismatch between revenues and expenditures, but credit plays a key role for smaller companies in filling this mismatch as well as provides working capital needs essential for payroll and inventories.

Are you ready? Have you prepared for what will happen if a recession hits? Suddenly and without much warning the bank tightens up your line of credit, your customers take longer to pay, and vendors are demanding payments from you now.

Recession or not, it’s prudent to spend time today to prepare your company for potential rough waters in the future (by the way, it adds to your bottom line now). In this article we will share with you some experience-tested axioms for surviving a recession.

Axiom #1: Practice the Golden Rule: He Who Has the Gold Rules.

When a recession hits it will drain your cash resources fast, so focus on stock piling cash. Make sure you have at least two to three months of operating cash available at all times.

Practice strong cash flow management. This is not simple because it involves predicting what is going to happen tomorrow. By forecasting the impact of today’s business decisions in your cash account at a future point of time, your goal in cash management is to fill the mismatch between revenues and outlays discussed above and to rely less on credit for that function.

Put a full-corp press on your collection of receivables, and become lethargic on paying your payables. Get as many of your customers as possible to pay within 30 days. If you have a significant number of accounts 60 to 90 days overdue, get active. Assign and train someone to call these accounts for a committed payment date.

Conduct reference checks on your customers so that you can determine their payment patterns. You don’t need to subscribe to an expensive credit service; simply ask for references from all new customers and then take a few minutes on the phone to check them out.

Make sure your invoices are easy to understand with terms clearly spelled out. If not, revamp them and begin a program to follow-up with phone calls ten days after invoices are mailed. This will uncover any customer issues earlier, which will help you get paid quicker, as well as result in better customer relations. You may also want to
develop a tiered payment program whereby customers receive incentives for paying early.

With respect to payables, take as long as you are allowed. Hold on to your cash as long as possible without incurring late fees or interest charges. Renegotiate terms with your vendors now to get at least 45 to 60 day (or preferably 90 day) terms.

Axiom #2: New Products Are Great . . . For Another Time.

Pouring lots of money into new product research and development during a financial crisis does not make good sense. Neither does ramping up major new marketing campaigns, so be sure to ramp down your marketing and R&D efforts along with the associated expenses. Remember that in a financial crisis your customers are going to be effected as well and they are not going to be buying as much as they were before.

It doesn’t make any difference whether it’s the newest, best, greatest, fastest, biggest, or whatever. Basically, customers will buy if they see your product can serve a need and help them in their current troubled situation. This is not a time to be heroic; rather, it’s a time to focus on core products, fundamentals, and competitive advantages. Your existing products and services may be good enough, and you may need to simply dust off your sales pitch.

Axiom #3: When It Comes to Inventory, Less Is More.

Your cash is wasting if it is tied up on excess inventory. You may have been able to get by with turning your inventory three to four times during a good economy, but in a financial crisis you need to turn your inventory five to seven times.

Take this example: a manufacturing company turning its inventory three times a year needs to buy materials worth four months of product demand. From a cash flow management perspective that means cash is sitting on the shelf generating no return for 120 days!

Some of you may be using just-in-time ("JIT") inventory management to ensure efficiency of your cash and tied-up inventory. However, JIT can also mask early warning signs of trouble so carefully monitor your inventory levels and turnover.

Axiom #4: Love Thy Banker.

When things are going smoothly, CEOs don’t put much effort into developing strong relationships with their bankers. In fact, most often bankers only hear from their customers when there is trouble.

Spend some time with your banker now to explain your business, and make sure they understand your business plan, your financial results and the action steps your are going to take to prepare your business for an economic downturn.

Providing credit to a business is as much an art as it is a science and the art relies very much on subjective information and decisions. The more information you can give your banker and the more they understand your business (and more importantly, you) the greater the chance you have for their cooperation during a financial crises.

Axiom #5: ‘Tis Better to Earn Than to Pay Interest.

After you fine-tune your billing, collections, payables and inventory system, create a financial system that accurately tracks your cash in detail. This system will help you manage your cash position more efficiently to get a greater return from the excess. If this is beyond the skills of your accounting people, hire a part-time Chief Financial Officer to do it for you. The return will far outweigh the extra expenses.

With effective cash management procedures, many companies are able to put small amounts of extra cash in a money market account where it can generate interest, yet be easily accessible. Explore setting up sweep accounts, where every day your bank leaves only enough in your checking account to cover the checks presented the night before for payment that day. The rest gets swept into overnight investments that provide
returns.

It will be impossible for your company to avoid an economic recession. However, you can be prepared for it by following these business axioms; your odds of surviving are greatly improved if you’re not caught flat-footed.