By Jared A. Asay, CPA
The world’s economic outlook, political environment, and social atmosphere are much different today than they were just a few weeks ago. Inevitably, some of these changes will take longer to overcome and others may never be the same. While no one could have clearly predicted a deadly virus outbreak, signs for an upcoming economic plateau, or even another recession, were inevitably on the horizon, even before coronavirus. Whether it’s the recent Great Recession, the early 2000s dot-com boom and subsequent bust, the Great Depression of the 1930s, or even a global pandemic such as COVID-19, successful companies should understand the imperative need to prepare for the worst and plan for the best.
Many successful companies have endured multiple recessions during their long and proud histories. Their ability to overcome these obstacles was not merely a matter of luck, fortune, or good timing. Rather, successful companies are always vigilant in looking forward and staying one step ahead. Even if an economic downturn or a significant catastrophic event never happens, when best practices are followed, your company will be better prepared for whatever tomorrow brings.
Here are the best practices to help your company prepare for the worst and plan for the best.
Timely & Accurate Internal Financial Reporting
Immediately knowing about and identifying changes in metrics and ratios is the best way to make quick and appropriate course corrections when needed.
Internal Monthly Reporting
If a company waits six months to close its books, then the opportunity to make any changes has almost certainly been eliminated, or at the very least diminished.
Conversely, if the management team has the necessary reports and data to immediately analyze, they are more likely to make appropriate modifications to operations, as necessary, before it is too late. The best practice is to close the monthly internal financial reporting within 15 days or sooner (accurate estimates should be utilized). Coordinate internal reporting with a CPA focused in your industry so that year-end attest results coincide with the monthly reporting throughout the year. Otherwise, expectations developed by the users of the financial statements will be misguided when significant year-end adjustments are proposed to change those results.
Share Financial Results
While the accounting department is typically known for reporting on historical results, the best practice is to use yesterday’s results to change tomorrow’s outcome. In a timely manner, the accounting department shares those financial results with the operations department so that the revised plans can be put in place to meet the company’s objectives and budgets.
Even though companies should be focused on tomorrow’s projects, there is much to learn from yesterday’s results. By comparing current metrics to yesterday (i.e., last month, last year, or even pre-2008), successful companies will be able to answer these critical questions:
- What were some of the key ratios and metrics during the company’s most successful period and how does that compare to current results?
- Is the current financial strength of the company enough to outlast another prolonged recession without relying on outside resources?
- When is the right time to make capital improvement investments to stay on the forefront of technology?
Flexible Balance Sheet
When companies use terminology to explain their balance sheets, words like strong, asset-heavy, appropriately leveraged, or equity driven are used with regularity. In order to overcome tomorrow’s potentially catastrophic events, companies should also strive to maintain a flexible balance sheet.
There are several ways to achieve this goal, including the right mix of owned equipment vs. rented equipment, strong relationships with banks and sureties, and appropriate communications with customers, vendors, and suppliers.
Owning equipment has certainly proven, in years past, to provide reduced costs throughout the life of a well-maintained asset. However, it can also be a significant burden when utilization rates drop. Instead of being used on a jobsite or in the plant and creating revenue for the company, underutilized equipment ties up precious resources. Even worse, the company may still be making monthly debt payments on that idle piece of equipment.
The best practice is to maintain adequate company-owned equipment to satisfy the historical or projected levels of volume and any additional equipment needs should be satisfied with short-term rental agreements.
Similar to equipment rental company relationships, maintaining a strong relationship with a customer-focused bank will allow for additional resources when timing of cash receipts and cash disbursements do not match up advantageously. Banks that have long-term relationships with their customers understand the ebbs and flows of the economy and avoid apprehension at the first sign of financial woes.
Like all relationships, the banker/company relationship goes both ways. The best practice is to maintain an active line of credit (with both frequent draws and pay downs) to help solidify the relationship, show the need for the line of credit, and prove the company’s ability to pay it off on a regular basis. The line of credit should only be used in short-term situations while any financing for long-term assets should utilize long-term financing options to preserve working capital levels.
Balance sheets have the most flexibility when there are adequate cash reserves. Cash can be used for many purposes – to purchase new fixed assets, pay down liabilities, or even generate interest income. Therefore, taking control of the cash flow process (both the inflows and the outflows) will help create a more flexible balance sheet.
Companies may not know when catastrophic events are going to happen, but successful companies are prepared because they know that they eventually will happen. Whether an impending market correction to the economy, an unfortunate significant loss job, or a global pandemic, these best practices will have your company better prepared to weather the storm.
The effects of the last recession still resonate clearly with most companies due to its depth and far-reaching impact. Remembering what changes worked and what did not work for your company during that time may be critical to overcoming the next similar challenge, which may already be in front of us. Implementing these best practices will help better position your company for long-lasting and sustained success.
Maintaining timely and accurate internal financial reporting and developing a flexible balance sheet are a few of the best practices for preparing for the worst and planning for the best. An accurate and timely accounting process is key to internal and external communication. Creating a flexible balance sheet where cash is king is critical for shielding tomorrow’s projects from depleting precious liquid resources.
In order to make these goals a reality, you must start implementing the necessary changes to your company today, not tomorrow.
JARED A, ASAY, CPA, is a member of the ASCPA and the Financial Partner at Conover Asay CPAs, PLLC, in Phoenix, AZ, which has a primary focus in the construction industry. His areas of expertise include audits, reviews, compilations, corporate and personal tax return preparation, proactive tax planning, and contract schedule analysis. Jared presented at the 2018 CFMA Annual Conference & Exhibition and has been an author for Construction Executive and Building Profits. Jared has been a member of the ASCPA since 2004. Jared is also involved in the Surety Association of Arizona, where he was a past Treasurer, and the Arizona Utility Contractors Association, where he is a current board member. He can be reached at (480) 500-6333; firstname.lastname@example.org or www.conoverasay.com.
Copyright 2020 by the Construction Financial Management Association (CFMA). All rights reserved. This article is adapted from “Preparing for the Worst, Planning for the Best” that first appeared in CFMA Building Profits and is reprinted with permission.