Riding the Economic Roller Coaster

You can't control the crazy, fluctuating world economic markets, but you can (and should) tighten your seat belt

Ask Frederick Roberts when he first began to get anxious about economic matters, and he doesn't even hesitate before replying. "It was when the news began to surface about all those problems in Asia," confides the president and chief operating officer of Certified Diabetic Services (CDS), a mail-order diabetic-supplies company based in Naples, Fla.

No, that isn't because his three-year-old company brings in any of its $9 million in sales from diabetics in the Far East. But when Asian companies started taking a nosedive, Roberts began worrying about a trickle-down effect that could possibly wind up affecting his company's credit picture. He explains, "When those companies were strong, they bought so much U.S. debt. Once it was clear that they were in trouble, I started asking myself what consequences that could have on our interest rates."

To Roberts, a former chief financial officer with years of experience in international finance, ignoring those early warning signs would have been foolhardy. "These days, you can't run a growth company without thinking globally," he emphasizes, adding, "That means continually trying to figure out which new factors or variables will likely affect your financial model--and adjusting your strategies accordingly." (It also requires the flexibility to keep readjusting in these unpredictable times, as Roberts needed to do when U.S. interest rates started falling rather than rising as he had originally expected.)

For some business owners, warning bells might have sounded when the bottom started dropping out of the U.S. stock market. Or maybe it was the collapse of the Russian economy, or Brazil's economic troubles, that created anxieties. Or maybe it was all those headlines about the $3.6-billion bailout of a hedge fund for the superrich (an especially painful reminder that rescue funds for small entrepreneurial companies are, shall we say, few and far between).

Business owners can't control the problems that have cropped up, and that may continue to develop, at various hot spots across the global economy. But they can--and should--take proactive steps now to shelter their companies from unwanted consequences of a worldwide downturn. After all, if a company's underlying financials are strong, it should be able to capitalize on competitors' weaknesses, prosper, and continue to grow, even in adverse economic times.

Protect your cash flow

To Seth Godin, president of Yoyodyne, a $5-million on-line direct-marketing company based in Irvington, N.Y., happiness for a business owner boils down to one simple thing: positive cash flow. At his three-and-a-half-year-old company, he confides, "we think about this every day. But there are a lot of people who forget, when times are as good as they've been during the past few years, that the business world is cyclical and that you need money to make money."

Sound cash-flow management is essential for any growing business. But here's the flip side of that reality: the stronger the economy is--and the faster a company is growing--the easier it can be to overlook cash-flow controls, sometimes without even suffering negative consequences...at least for a while. "The best thing about volatile economic conditions is that they remind managers to refocus their attention on the basics," notes Jeffrey Levine, a certified public accountant based in Newton, Mass., who warns his clients that it could take as long as 12 to 24 months for the full ramifications of today's economic problems to hit their businesses.
Granted, some companies' cash flow will take it on the chin much sooner than others', especially if they sell directly to countries or industries that are already experiencing difficulties. But there's only one way to begin, and the time to do it is now: evaluate your cash-flow controls, and tighten them promptly wherever it seems necessary.

If there is one single point of vulnerability in most companies, it's accounts receivable. That's because entrepreneurial companies almost invariably make the mistake--especially in their early or fast-growth stages--of paying much more attention to making sales than to collecting receivables.

That's never a great idea, but when the economy slows down and more customers start taking longer and longer to pay their bills, the result is a cash crunch. Factor into that the growing number of corporate bankruptcies that have dotted the U.S. business scene since 1997, and all those uncollectable bills could well turn the crunch into a cash-flow crisis for far too many companies.