5 Ways to Address an Economic Dip Within an Economic Downturn
March 25, 2021 |
The C2FO Team
If recent events have taught us anything, it’s to expect the unexpected. What steps can your company take to respond to any surprising ripples in the marketplace?
It was the summer of 2016 — a time of relative economic stability. A US presidential election between Donald Trump and Hillary Clinton was still months away. The biggest financial concerns were a slowing economy in China and a worldwide oversupply of oil.
Then, the unexpected happened.
On June 23, the United Kingdom voted to leave the European Union by a slim margin in a national referendum. The currency markets immediately went into turmoil, with the pound and the euro dropping in value. British Prime Minister David Cameron, who triggered the referendum and had supported staying in the EU, announced that he would soon resign.
“Brexit” had begun, shocking world markets and ushering in an era in which populism and nationalism would take center stage in many countries.
No one saw it coming.
Last year, of course, brought even bigger surprises. The global economy continues to slowly recover from the coronavirus pandemic. Hopes are high that the rollouts of multiple vaccines will end the pandemic this year and bring more worldwide stability.
But what of the unexpected? In a still-fragile economy, what happens if another unpredictable event causes a crisis in 2021?
In today’s economy, access to liquidity is more crucial than ever, said Eric Striegler, C2FO’s managing director and head of market innovation for EMEA.
“It’s no longer a question on price, it’s a question of survival,” he said. “How many big corporations did we see last year draw 100% of their revolving line of credit that they had never needed to draw from before?”
As 2020 has shown, your business needs to be prepared for whatever comes next. It’s unlikely we’ll experience a global economic collapse like we did in the spring and early summer of 2020. But a dip in the economy from an unforeseen event isn’t out of the question.
Here are five ways your business can be prepared for those disruptions:
1. Have a wide range of funding options
During economic upheaval, the first instinct of companies is to hold on to as much cash as they can. The first instinct of banks is to reduce their credit risk.
Those reactions are understandable but can leave many businesses, especially small to mid-sized businesses (SMBs), in severe need of liquidity.
To prepare for this dilemma, it helps to maintain a diversified portfolio of potential funders, whether that involves traditional credit lines, asset-based lending, factoring or requesting early payment on receivables.
In March, a large supply chain finance provider experienced funding difficulty that significantly impacted markets and companies across Europe, North America and parts of Asia. For the businesses affected by this disruption, C2FO offered to waive system set-up fees to its secure online platform and diverse multinational funding network to help enterprises manage the unexpected events occurring across the supply chain finance industry.
That’s just one example of how funders can step into the breach when liquidity dries up. Over the past year, many companies learned the hard way that having access to a wide range of funding options was crucial to their survival.
2. Prime your cash conversion cycle and other metrics
Over the past year, governments have poured money into the global economy to offset the effects of the pandemic. In the United States alone, the monetary base, from which dollars are created, increased 50% in the past 12 months, while the actual stock of money has increased by 26%.
That creates a ripe environment for inflation to rise over the next two years. How can your company combat this? One way is by tightening your cash conversion cycle (CCC) and bolstering your cash flow, allowing you to spend on commodities and products for your business that may increase in cost in the coming months.
The events of 2020 have brought a heightened awareness of CCC and other metrics for improving working capital. Before the pandemic, improving days sales outstanding (DSO) and days payable outstanding (DPO) were already priorities for many companies, but now they are necessities, C2FO’s Striegler said. In addition, reducing days inventory outstanding (DIO) has become particularly important, as many companies’ supply chains were woefully unprepared for the events of 2020.
“Many companies are paying high consultancy fees to come up with a solution to reduce their DIO number,” Striegler said. “All of a sudden, finding each penny has become more important than ever.”
3. Work closely with customers and suppliers
In C2FO’s recent Working Capital Survey of more than 6,700 SMBs across 16 countries, many of them said that one of their top concerns heading into 2021 was their customers’ ability to continue placing orders.
Given the continued uncertainty of the economic recovery, having clear, open communication with your customers is more important now than ever. In addition to helping you to better understand the peaks and valleys of their businesses, it lets them know you are invested in their success as well as your own. Likewise, communicating clearly with your suppliers about changes to your business or new initiatives being undertaken is also key to building a trusting relationship.
One way to collaborate with customers and suppliers in times of uncertainty is through more effective working capital management. The solutions on the C2FO platform enable you to accelerate or extend your payables and receivables at times that are most beneficial to you, your suppliers and your customers.
4. Explore new opportunities
If your business happens to be in a strong cash position, now may be the right time to explore new ideas and expansions that didn’t seem possible before the pandemic.
Those opportunities for an acquisition or a new product rollout may not be as optimal a year from now, as the economy continues to rebound and costs rise.
“A lot of people are thinking about how asset values right now are low. They’re thinking, ‘This could be an opportunity for me to deploy capital,’” Striegler said. “For those who have the money, they’re looking at a lot of opportunities that this economy brings them that they may not have had in the past.”
5. Anticipate and embrace change
Almost everyone agrees that, when the pandemic finally passes, the world will still be quite different from the way it was in 2019. Consumer spending habits have changed, possibly forever. Lifestyles will be different, with less commuting to and from work, and less business travel. Even retailers that thrived during the pandemic — primarily e-commerce companies and big-box stores providing essential goods — know that a dip in their business may occur once herd immunity to COVID-19 is established and consumers return to some of their old routines.
A massive amount of social change has happened in the past year, and companies are aware of that. Forward-thinking initiatives, like diversity and inclusion and environmental, social and governance (ESG), which were under consideration pre-pandemic, are now executive mandates with dedicated resources for near-term execution. Now more than ever, companies of all sizes are under pressure to help make the world a better place.
“ESG is very real in almost every single conversation with clients that we have,” Striegler said. “It was part of the agenda before, but the events of the pandemic have made concerns about the environment much more relevant and concerns about social changes much more relevant.”
The uncertainty of the pandemic era has heightened the need for companies of all sizes to anticipate and plan for a wide range of scenarios.
Is your company ready for the next dip in the economy? Will you be prepared to sustain operations and possibly even capitalize on a new opportunity?
Fortunately, there are many resources available to help you prepare for the unexpected, including the suite of working capital solutions that C2FO provides.