Vistage speaker Brian Beaulieu, an economist with the Institute for Trend Research, projects a fairly mild recession with a very strong recovery. Vistage speaker Ed Freiermuth, a former banker and current turnaround strategist, foresees a slightly more painful economic adjustment and a milder recovery. Despite their divergent outlooks, both agree that the coming downturn represents a time of opportunity for well-managed companies.

Freiermuth attributes the current downswing to an excess of corporate and consumer debt and over-leveraged companies that have caused a credit crunch within the banking industry. Beaulieu believes the recession will unfold as more of a "sectoral" correction, with mature manufacturing and high-tech industries taking the brunt of the blow.

To prepare your company for recessionary conditions, Beaulieu recommends the following:

Set conservative budgets so you don't hemorrhage cash.
Build in as much financial liquidity as possible.
Work with your lenders to get as much credit as possible, striving to maintain a 10 percent margin for error with your financial covenants.
Prepare a comprehensive cash flow forecast that includes best- and worst-case scenarios.
Scrutinize every job in the company to determine which ones are essential to the core business and which can be cut if needed.
Once you have these defensive strategies in place, start thinking about how to position your business to take advantage of the next economic upturn.

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Understanding Economic Cycles

According to Beaulieu, every economic cycle consists of four distinct phases:

Phase A (Advancing). In phase A, the economy has hit bottom and is just beginning to come out of a recession. Trend data for sales, orders, inventory, etc., continues to look dismal (and may still be trending downward) but leading indicators point to a recovery in the near future. During this phase, companies should shed their defensive tactics and begin ramping up for the recovery.
Phase B (Best). During this phase, the economy runs progressively higher than the previous year and trend data climbs at a sharp rate. Companies should take risks, budget for prosperity, implement aggressive expansion programs that were planned and staffed for during phase A, and roll out new products and services
Phase C (Cautionary). In phase C, the economy begins to weaken but hasn't turned overtly negative. At most companies, performance continues to run above previous year levels, but growth gets harder to achieve. Instead of pursuing growth, companies should stop hiring, avoid long-term purchase commitments, tighten requirements for capital equipment expenditures, weed out inferior products and begin implementing cost-cutting measures.
Phase D (Danger). In this phase, the economy has turned overtly negative. Data trends have fallen below previous year levels and are actively declining for most businesses. Companies should manage for survival rather than growth, pay extra attention to cash flow, margins and key financial ratios, tighten up on accounts receivables, and adopt a defensive position vis-à-vis market and pricing pressures.

Taking advantage of economic downturns, says Beaulieu, requires the ability to predict with reasonable accuracy when one phase will shift gears into the next. This can be accomplished by:

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Preparing for the Downturn

Freiermuth recommends seven steps for preparing your company to ride out the economic storm:

Analyze the business. Put together a five-year financial history of the business and look for trends in key financial ratios. Use the "Robert Morris Associates Annual Statement Studies" to compare your company's performance to the industry as a whole. Search for signs of trouble within your industry, such as excess capacity, unreasonably low prices and erosion of the top line.
Create a worst-case cash flow forecast. Build a worst-case scenario that assumes a 10 to 20 percent drop in sales. Identify the level of operating cash needed to run the business and look at where you need to make cuts in order to ensure that the money going out doesn't exceed the money coming in.
Review the terms and conditions of your loan covenants. Go over the terms and conditions of your bank loan, making sure you have plenty of room to remain in compliance with all the covenants. Strive for a 10 percent buffer on every covenant.
Identify internal weaknesses. Look at every aspect of the business to identify internal areas of weakness, including over-staffing, excess inventory, too-liberal credit terms, increasingly aging accounts receivables and declining quality standards.

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Acquiring Troubled Companies During an Economic Downturn

According to Freiermuth, the process of acquiring troubled companies requires four basic steps:

Make sure your company has a solid financial foundation.
Identify the prey (targets for acquisition).
Get a "hunting license" (access to capital funds) from the bank.
Buy the assets of troubled companies.

To identify potential acquisition candidates:

Study the financial condition of your competitors. In the U.S., use EUCC-1 lien searches, SEC reports and other publicly available information.
Compare competitor information to industry statistics.
Find out who is accepting the unprofitable business you turn away.
Talk to your counterparts in competing companies.
Talk to your suppliers and customers.

In order to grow when everyone else is cutting price, you must have access to capital. This requires an opportunity-focused business plan that tells a compelling story. When approaching your bank for a "hunting license" (a line of credit that allows you to pursue acquisition opportunities):

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Extending Credit in a Down Economy

When the economy goes south, most companies tighten up on credit approval. However, smart companies look for ways to use the credit function not only to retain current customers but to gain new ones as well. According to Vistage speaker Abe "WalkingBear" Sanchez, managing the credit function during a down economy requires three steps:

Hold onto your current customers. To keep your customers from bolting to the competition, add more value by lowering the cost of doing business with you.
Reach out to new customers. Look for ways to accept new customers you would normally turn away. This doesn't mean extending credit to anyone who walks through the door. However, if you can find a way to minimize the risk and remain confident of payment, there's no reason not to extend credit.

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Stepping Up Accounts Receivables

During a soft economy, collecting on accounts receivables becomes more important than ever. Sanchez recommends a three-step process for collecting on delinquent accounts in a timely manner.

Understand why customers haven't paid. Past-due customers come in three categories:
- Slow payers are good, stable customers who have the ability to pay. When they cut you a check, you know it will clear.
- Problem payers have either systems or financial problems. Systems problems involve some glitch in the process (i.e., missing contracts or purchase orders, unused or misapplied credits, lost paperwork) that prevent the customer from paying. Financial problems, which can be short- or long-term, occur when the customer doesn't have the money.
- Avoidance payers deliberately try to avoid payment. Fortunately, they represent a very small percentage of delinquent accounts.
Close the "sale." Determine which type of customer you're dealing with, then take the appropriate steps to collect your money:
- Contact the decision maker. Start the conversation by saying, "Hello. I'm Joe Smith from ABC Company. Our records show that invoice #111 dated January 1 is still open. Can you help me with this matter?" Then sit back and listen.
- Determine the type of customer. Ask questions and listen closely. Their answers will tell you what type of customer you're dealing with.
- Make your presentation based on the type. For slow payers, focus on getting the customer to pay you closer to the agreed upon terms of sale. For systems problem payers, identify any problems and fix them immediately. For financial temporary customers, express a willingness to work with them while selling them on the benefits of continuing to buy from you. Cut financial serious customers off at once or put them on C.O.D. only. Put avoidance payers on C.O.D. and send their account to a collections agency or attorney.

Close the "sale" and follow up. Get a firm commitment from the customer on when they will pay and then use a good contact management system to track the account.

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Turnaround Time

Suppose reality exceeds your worst-case scenario and you find yourself in serious financial trouble -- what happens then? First, says Vistage speaker John Zaepfel, ask, "How did we get here, how serious is the situation and how much time do we have?" Then implement the following 10-point plan for recovery:

Go into full crisis mode.
Protect and manage your cash flow.
Develop financial discipline.
Attack the gross margins.
Work with your bank and creditors.
Create a cost-control team.
Revise the organizational structure.
Protect your service and current accounts.
Focus on the core business.
Identify a new model for the business.

Once the immediate crisis has passed and the company has achieved a positive cash flow for the short-term, the next step involves practicing ongoing financial discipline to achieve long-term profitability. According to Zaepfel, this includes the following:

Strive to increase your cash buffer.
Tighten up on accounts receivable.
Reduce inventory.
Liquidate underutilized assets.
Extend payables.
Track key balance sheet ratios.
Continually reforecast sales.
Keep a lid on cost of goods sold.
Tighten credit.

Ultimately, turnaround situations require intense focus from the person at the top. To keep things as simple as possible:

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