Give Your Company a Financial Health Checkup Now

A fluctuating economy. An uncertain future. No wonder so many small- and medium-sized businesses face existence-defining decisions regarding their financial health. Between bank loans, taking on private debt, or government assistance programs like PPP and EIDL, drafting the right financial health plan is more critical now than at any point since the Great Depression.

Fortunately, financial planning doesn’t have to be overwhelming, even for industries bearing the brunt of recent disruptions – including healthcare, with its influx of patients, and supply chain operations facing an onslaught of demand. If your decision-making is firmly grounded in lessons from the past, advice from the present and an eye toward the future, you can implement a plan that fosters sound financial health regardless of your business model.

Financial Health Lessons From The Past

To better understand financial planning in uncertain times, a good starting point is an industry that historically has weathered every economic storm to sweep the planet: supply chains. During a global disruption, the impact on supply chains can be seen in the ripple effects radiating across industries of all types. Nearly every business relies on some sort of supply chain, so it’s helpful to understand how suppliers mitigate triggering events and keep threats to their financial health in check.

One Deloitte report about managing cash flow during COVID-19 points to lessons learned by the supply chain industry during other black swan events, such as the 2003 SARS outbreak and 2008’s Great Recession. Financial guidance from this study, applicable to almost any business, includes:

• • • Managing your risk. Supply chains must understand the financial risks their trade partners, suppliers and customers bear. Same goes for any other type of company. Knowing the financial situation of everyone you do business with, even backing receivables through letters of credit from a bank, helps to ensure your partners, suppliers and customers can and will pay. You can also focus on inventory management to keep risk at an opportune level, either increasing inventory to create a buffer or decreasing it to avoid getting stuck with unmovable goods.
    • Checking company financing. In a global crisis, you find myriad businesses simultaneously pursuing financing. This means funding can rapidly dry up and everything can change in a flash. We’ve already seen how quickly PPP and other government funds disappeared. Take this time to shore up your usual lines of credit or explore new financing avenues as needed, including traditional SBA 7(a) loans and microloans, special SBA loans, small business term loans from banks, business credit cards, accounts receivable financing, vendor tradelines, merchant cash advances, purchase order financing, inventory financing and equipment financing.
    • Rethinking overall strategy. When business as usual becomes unusual, supply chains often adjust their way of thinking to stay afloat – your company can do the same. This may include focusing more on the cash-to-conversion cycle, reducing variable costs (hiring freezes, redistributing labor, etc.), adjusting capital investment plans, working with suppliers to extend payables, converting fixed costs to variable costs and diversifying revenue streams by thinking outside of the box. Of course, each of these options requires nuance and finesse, as you don’t want to simply shift the burden to another part of your business. A problem isn’t truly solved if it creates more financial problems down the road.

Listening to the Present

In addition to looking back, actively listening in real time can also help companies improve their financial health. Keeping an ear to the ground allows you to anticipate how consumers and vendors will react to the recent economic disruptions, helping you respond in all the right ways.

An easy way to accomplish this goal is to listen for advice given to your clients by industry experts. For instance, one popular fabrication website published a list of questions manufacturers should ask – and the answers they should expect – in order to assess their supplier’s post-pandemic readiness. Suppliers could, in theory, use this info to make sure they have the correct answers when their clients ask:

• • • Does this supplier offer duplicate services from multiple locations? Offering multiple points of service creates a layer of security because customers are assured of backup options should something go wrong. If supplies run out or an entire warehouse team gets quarantined, can the supplier ship from another location? This type of contingency transcends the supply chain and applies to just about every business. For example, a healthcare facility could expand testing locations to multiple facilities to reduce backlog, congestion and fear.
    • How does this supplier react to delayed projects or order holds? Events like the recent pandemic affect every aspect of business, so disruption is inevitable. Suppliers with built-in allowances for delays, those who work to understand why delays happen and then offer actionable solutions, get repeat business. And that reality applies across the board, no matter what industry you’re in. Asking questions, offering insight and providing solutions can help you maintain – and even grow – your customer base.

Create a list of sites and then keep up with the latest advice regarding your clients’ industries, searching for information that helps you understand what they’re looking for in a vendor or service provider right now – and what they’re watching out for.

Reorganizing Financial Health For the Future

Even if you anticipate everything correctly, the fact of the matter is that finances are in a state of flux for businesses of all sizes across almost every industry. This means that your typical financial processes will likely need to change.

As strategy and finance experts McKinsey & Company point out, “In normal times, financial-planning teams generally use a range of driver-based models for budgeting, forecasting, and root-cause analysis.” Unfortunately, this model might not hold up during uncertain economic times.

In fact, McKinsey even suggests replacing driver-based models with a temporary, five-point, systemic process for financial planning that can apply to just about any business, regardless of liquidity or risk tolerance. They go into more detail at the link above, but in summation:

1. 1. 1. Clarify your starting position. Assemble a cross-functional team of experts to create a comprehensive picture of past and present trends, business and market drivers, and key indicators. Your team should develop a baseline of facts to compare emerging scenarios against, in order to identify your company’s direction for the next year and a half.
      2. Model an array of scenarios. Create at least four financial scenarios that could take shape over the next year and a half and see how they play out against the fact bank that your team created in the previous step. Map out each scenario for not only the depth and duration of any decline in revenue/business/productivity, but the recovery time as well. The scenarios suggested by McKinsey are best-case, worst-case, most-likely case and status quo. Build momentum cases and stress-test forecasts – without being too precise or optimistic – then build quarterly plans up to 18 months out.
      3. Align on a financial pursuit. The scenarios that make the most sense can help your company create a financial health plan. Your specific direction could land on sustaining operations, slightly shifting focus or radically changing gears, or they could fall anywhere in between. Give extra consideration to centering financial plans around maximizing cash flow for sustenance, with additional attention given to implementing new employee initiatives to match your new direction.
      4. Balance the right moves. McKinsey also suggests that creating, implementing and tracking the right initiatives can be achieved by finding the right balance between “no-regret moves, big bets and real options.” For some companies, this could mean divestment of lower performing products or services and moving capital to higher performing ones. For other companies, products or services could be prioritized not by performance but by current initiatives – with an eye toward the future. It all depends on your financial planning process to this point, plus your goals.
      5. Identify relevant triggers. During triggering events, it might be tempting to track your typical key performance indicators (KPI), but McKinsey’s model suggests that only around 10 variables actually matter. These can include retention rates, sales and cash figures, and metrics from the sales pipeline. No matter which metrics you decide are most vital to your analysis, it’s important to implement a tracking system, perhaps a dashboard, so that those making decisions receive the most relevant and timely data. It’s also suggested that businesses identify a set of KPIs that signal an emergence from crisis into the new normal – whatever that looks like – as a company’s early recovery typically results in larger market gains. In short, you’ll want to know exactly when you get out of the mire in order to capitalize on your success.

Signs That Show Strong Financial Health

So how can you tell when the changes you make to your financial health plan are working? There are many signs that a company is enjoying good financial health, including:

• • • An increase in revenue with relatively flat expenses. Revenue increases can happen month-over-month or year-over-year but, no matter what time frame you look at, your expenses should rise similar percentage amount. If your expenses are rising faster than your revenue, it’s time to take another look at your strategy.
    • Hitting the perfect mix of ratios. Like dialing in harmonious sound setting son a home theater, your activity ratios should have the perfect mix of highs and lows. For example, while your profitability, inventory and asset turnovers should be high, your operating and debt ratios should remain low.

Of course, each business is different, with different plans for growth as well as definitions for success. But no matter how you define your goals, taking steps to improve your company’s financial health is a good idea for just about any situation – including post-pandemic recovery for your business.

At Seacoast Bank, we’re here to help with everything from financial to organizational health. If you have questions about the financial side of your business, or you want to know more about the solutions we offer for business banking, contact your local banker today using the form below.