Things are Booming Now, But Take Heed of these Lessons from the Great Recession

When economists and historians look back on the Great Recession, they will debate its causes and whether more stimulus should have been applied by the government to kick-start the recovery. But there should be no debate about what business learnedor should have learnedas a result of going through what for some was a near-death experience.

Each time I meet CEOs, I ask them how their companies survived and, in some cases, thrived during the past four years. Here are some lessons learned:

Have a strong balance sheet.

The best businesses (and those that thrived during the recession) have strong balance sheets. A strong balance sheet has liquidity, financial flexibility (the ability to borrow when necessary) and a low debtto- equity ratio. A strong balance sheet is built over time through careful planning and use of resources. After all, there are only two sources of capital: investment by owners (risk takers who eventually want a return) and profits. Obtaining the proper balance of investment and profits takes time, and choices must be made about capital and how to use it.

During the recession, successful businesses took a hard look at their investments and, in some cases, sold unproductive assets, thereby freeing capital to increase liquidity or increase financial flexibility. Other businesses had to rebalance the balance sheet. They had invested in long-term assets using short-term liabilities and refinanced debt to restore liquidity.

Not all assets and liabilities are measured on the balance sheet. The best businesses take a holistic view of their balance sheets by including all contingencies in the planning horizon. They work to acknowledge and to reduce the contingent liabilities that could become real liabilities, such as those related to uncertain tax matters, possible unfair employment practices or intellectual property infringements. Unchecked, these problems could leave a companys management vulnerable to distraction or costly litigation.

Create deep backup plans.

As dire economic predictions began to appear in 2007 and 2008, many businesses began to notice and make adjustments to their plans. The best businessesthose with a close ear and hand on their customers and vendorscould sense trouble coming and could assess its impact with greater clarity. Those businesses knew exactly what they would do if sales dropped. They knew where and how deep to cut costs. They also knew when to act.

Continue to invest carefully and innovatively.

Businesses that successfully weathered the recession didnt shrink from making investments in their future, but they didnt go wild, either. At Clark Nuber, for example, we continued to invest in training and hiring, but cut discretionary costs. One of the benefits of a strong balance sheet is having the resources to take advantage of real investment opportunities. In times of economic turmoil, opportunities that otherwise would not be present can emerge. Weaker competitors may signal an interest to merge, which could open new possibilities.

Manage to the bottom line.

No matter what happens, manage the business to produce the budgeted bottom line. Watch for progress and danger signs early. Business leaders must plan for and define the criteria that would cause plans to change to protect the bottom line.

Businesses with high levels of fixed costs have the most trouble with this form of management. However, even businesses whose fixed costs are composed of investment in plant and machinery can manage through downturns with some planning. For example, a business with declining demand for its proprietary products may be able to use its machinery and equipment to do contract work for alternative customers.

It has been said that there are only four ways to grow a business: get more customers (of the type you want), increase the amount of business from each customer, increase the price for goods/services, and become more efficient and reduce costs.

This is true whether the business is facing good or bad times. If the goal is growthor just to survive the tough timesbusiness leaders can use these levers to accomplish those objectives. Stay focused on these principles and your business can also weather the next economic storm.

RONALD G. RAUCH is a shareholder with Clark Nuber in Bellevue. Reach him at 425.635.4537 or [email protected].