Use the Cyclical Building Economy to Your Advantage
Anyone who has been in the building supply industry for more than a decade knows that it’s a highly cyclical industry. As we saw recently, the new-home sector can deliver nearly two million housing starts one year… yet drop to less than a third of that in a matter of months. Though other downturns in the past have not been as severe as the Great Recession, that didn’t lessen the impact of the downturns on the building material dealers who were not prepared. Fact is, the upbeat economy we are in today will not last forever. So, it is instructive to look back at what business practices enabled LBM companies to survive in the last downturn, and what they did to position themselves to thrive when the inevitable upturn eventually came along.
Here is one thing that’s clear when looking back at the Great Recession: Companies that survived focused on maintaining healthy cash flow (albeit reduced in scale in the downtimes) and they did this by implementing “best practice” accounts receivable (A/R) management. By doing so, they showed the discipline and fortitude that is a common trait in the most-admired and successful LBM dealers. Looking back at the Great Recession may be painful, but it is instructive, and the reason we are doing it now is because managing solid A/R remains a top concern for today. It’s all the more important because some macro indicators are pointing to increased risk of a cyclical downturn in the not-too-distant future. Are you ready?
Improving cash flow management is not that difficult. Often it’s just a matter of breaking old habits. So, here are key areas to examine, with an eye to implementing best practices. Keep in mind that you may need to implement just one or two of these. All four are not necessarily required: 1) Receivables, 2) Credit Management, 3) Credit Insurance, and 4) Credit Monitoring.
1. Reduce the gap between A/R and A/P. Although you may have personal relationships with your customers, and a change in A/R policy might be uncomfortable to explain, request that all customers pay down or entirely clean up their delinquent balances. For customers that are perennially late, move them to C.O.D.
2. Credit management companies make excellent partners, in good and bad economies alike. A B2B credit management company will pay you upfront for all your sales, and protect you from credit risk. B2B credit management providers offer customizable programs that free up cash flow, while offering credit monitoring, billing, and collections.
3. Look into credit insurance for customers that are high-risk, especially if they represent a disproportionately high percent of your overall business. (Anything approaching 10% for any one company is in the danger zone.) Ask this crucial question: If this one customer goes under, will it sink my business? If the answer is Yes, act now to clean up their A/R, and put strict policies in place for making sure they pay in less than 30 days net.
4. There are a number of business credit-monitoring services available today, such as Experian, D&B, or Cortera. They can provide you with valuable insight into your customer’s financial condition. Why not pull credit reports on your major customers every four months, just to gain assurance that they are not overly leveraged?
These recommendations may seem unduly aggressive, until you realize what’s at stake: The very survival of your business. Think of it this way: Imagine it’s 2006 again. What would you have done to prepare if you’d known the severity of the downturn to come? The next downturn may not be as severe as the last one. But why not prepare for the worst, so that you ensure the health and growth of your business in both good times and bad?
Finally, underscore your commitment to having cash on hand. Conservative business managers suggest that you should have three to six months of operating cash in reserve at all times. There are unplanned expenses in the life of every business, and “dry powder” offers you a much-needed hedge against the unexpected. Even more important, cash on hand can help you survive when companies that are less prepared are forced out of business in a down economy, potentially opening up new opportunities for you when the economy perks up again.
We all know that you are a better dealer to your customers when you are not cash constricted. Cash lets you provide superior customer service, a rich inventory, new product introduction programs, along with great employees and equipment…and isn’t that why you got in this business in the first place?