James Hutton believes he’s one of the lucky ones.
His company, Kitchener, Ont.-based Hutton Forest Products Inc., is well poised to weather the current economic storm. The distributor of wood products has a strong balance sheet, runs lean with a small staff and has been growing rapidly since its 2005 launch, logging profitable sales of nearly $20 million in 2007. He expects to match that performance this year.
Yet, despite those results and recent cuts to the Bank of Canada’s prime lending rate, Hutton’s bank recently stunned the entrepreneur by increasing his preferred loan rate by a quarter of a percentage point. And the loonie’s plunge against the U.S. dollar recently cost Hutton $125,000 on a single order of U.S. product.
Such nasty surprises are among the many financial challenges posed by today’s souring and turbulent economy. But it’s not too late to harden your business against the future shocks this downturn is likely to bring.
The best place to start is to preserve your access to credit, says Ted Mallett, chief economist with the Canadian Federation of Independent Business. He says sending frequent and even unsolicited financial reports to your banker keeps your lender abreast of your financial successes and struggles, which will help stave off a credit review. (Yes, you can expect your bank to be more vigilant in the months ahead: The Bank of Canada’s latest Senior Loan Officer survey confirmed the “widespread tightening in both the pricing and non-pricing dimensions of business-lending conditions” that many business owners had suspected for weeks.)
Naturally, it helps to see trouble coming. To that end, continually monitor key performance indicators such as working-capital levels and debt-to-equity ratios, advises Suzanne Loomer, a Toronto-based partner with accounting and advisory firm BDO Dunwoody LLP.
Hutton, for instance, conducts a daily review of average days outstanding on receivables for each of his customers, helping him to identify cash-strapped clients before it’s too late to collect. Still, his receivables have stretched from 30 to 45 days or more. “Guys who I would have entrusted my children with are now¦ doing what they can to survive,” Hutton laments. “You end up tightening everybody in a bit because you’ve been bitten a few times.”
But what if you are the deadbeat client? Loomer recommends renegotiating prices and credit terms with suppliers before the problem spirals out of control. Firms will show flexibility out of self-interest. Hutton recently won price concessions from some suppliers to aid a faltering customer, and even convinced buyers of one product to accept higher prices in order to keep the producer afloat.
Such cases illustrate how tricky managing through a recession can be. “The more you sell, the more you put yourself at risk,” says Hutton. “It’s like tiptoeing through a field of landmines. It’s better to work with the guys that you know and help them manoeuvre through these tough times.