Does your strategic plan account for the possibility of increased market risk and high financing costs? If not, then consider the following. Just when businesses thought the damaging effects of the 2008 recession were over, along comes a new and more menacing threat posed by a potential Euro zone failure. Whether it’s Greece, Italy or Spain, one of these countries is sure to have a long-lasting impact on global financial markets. In fact, it’s happening already and either your company's strategic plan addresses this market risk, and possible higher financing costs, or it will suffer the consequences.
Understand the Impact of Higher Financing & Market Risk
Today’s business climate requires a new approach to strategic planning, one that is ultimately predicated on managing risk and having a clearly defined exit strategy when confronted with calamities such as a lack of business financing. So how can your company better manage risk in today’s uncertain business world?
First, it’s important to note that the focus should never be on just handling one specific financial situation. This often implies that companies should adopt strategies after the fact, when in reality they should have a readymade plan to deal with future situations. As such, the focus must involve putting a plan in place to protect the company’s interest against any and all threats posed by current and future financial downgrades.
It’s about defining that exit strategy within your strategic plan and making sure it takes into consideration the impact of a lack of financing on your company’s business, your vendors’ businesses, your customers’ businesses and the market all of you operate in. We are now globally integrated and today’s Euro zone crisis is simply a sign of things to come. So when it comes to defining your exit strategy to account for calamities such as this one, where should you focus your efforts?
1. Define Financing Costs on Inventory, Receivables & Sales
What will a sudden increase in financing costs mean to your company's costs on inventory, receivables and your company's ability to finance its sales transactions? Take the time to define the impacts of an increase in interest rates on your company’s costs to finance its inventory, the costs to hold receivables for longer periods and their net effect on your company's costs of sales. Next, focus on the impact on your company’s headcount and your company’s financing costs on receivables. Increases in interest rates mean your inventory costs will increase, as will your costs to hold onto your customer’s unpaid invoices. The post Strategic Planning: Reducing Inventory & Receivable Financing Costs provides insight into defining financing costs on sales.
2. Define Impact of Financing on Vendors’ Businesses
Your supply chain is an essential aspect of your company’s success. Encountering material shortages is no fun. It’s essential that your strategic plan include your company’s ability to deal with a sudden impact on your supply of raw material and finished goods. One of those steps must include taking the time to discuss the impact of financing with your vendors and their ability to service your enterprise.
3. Define Impact of Financing on Market
It is one thing to account for higher financing costs on your business, and that of your vendors, but it’s something else entirely to account for the negative impacts on your entire market and industry. How will your strategic plan take into consideration the impact of higher finances costs for all players within your market? How will this affect your customers, your vendors and ultimately, how your creditors approach your business? When answering this question, think not only of the impact on financing, but on other items such as equipment warranties and the interest rates charged on capital expenditures. A change in financing affects all your assets, whether they by your inventory, your cash holdings, or the lease rates on your equipment and machinery. If needed, take the time to measure factoring costs against standard bank loan financing in order to analyze different financing methods by customer.
4. Identify Outlets for Quick Sales:
Up to this point we’ve mainly been concerned with defining the impact of financing costs on the business, vendors and the market itself. Now the strategic plan must identify ways to offset these increases in costs once they take effect. This includes isolating those customers that represent the quickest sales, or those that have the shortest sales cycles. However, the focus isn’t merely to make a sale, but to shorten the time it takes to get paid. Prepaid customers are excellent sources of immediate cash. Take the time to identify those customers in your market that represent the fastest way to secure cash.
5. Assess Liquidity of Inventory and Assets:
This last step involves defining those product lines that the company can sell immediately, versus those product lines that take longer to sell. There are two approaches to making this work. One school of thought says that those product lines that take longer to sell should immediately be liquidated, or sold as scrap. Reduce the pricing immediately in order to spur sales, or get cash for dead stock. The other says the importance of immediately liquidating dead stock should never be ignored and to take this action across the board with all product lines, regardless of whether they are slow moving or fast selling product lines. While both are valid arguments, the best strategies are ultimately tied to your market and your customers’ order patterns.
The above video is from the post: Choose the Right Supply Chain Strategy: Make it an Easy Choice
Very few companies take the time to outline the consequences of a market in decline. Even fewer take the time to define those consequences when faced with a financial calamity. Don’t be one of those companies unable to respond to such an emergency. Make sure your strategic plan accounts for a financial downgrade by defining the impacts of higher financing on your business, your vendors’ businesses and your entire market. Next, define the surest way to turn your company’s assets into cash by immediately liquidating slow moving inventory, and closing as many quick sales as possible. You can account for market risk and high financing costs within your strategic plan, provided you outline those costs.
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