4 traits of financially resilient businesses

According to Boston Consulting Group, an average of just 14% of companies increased both sales growth rate and EBIT margin during the last four economic downturns since 1985. Companies’ response to downturns, they found, were “defensive”, focused on short-term actions over building long-term resilience.   

One of the key reasons for this lack of resilience, most analysts agree,  is poor working capital management. By contrast, companies with effective cash management are 25% better at mitigating the initial shock of disruptions.  

However, financially resilient businesses also demonstrate three other key traits: they foster operational flexibility, allowing them to maintain consistent earnings when top-line performance falters; they proactively manage existing debts and create large liquid reserves; and they invest where it counts. Hilton Smythe digs deeper.

Effective working-capital management

On average, mid-market companies operate with 30-90 days of liquidity, and lack robust balance sheets, large credit lines, or significant cash reserves.

Yet, efficient cash flow and working capital management will be your suit of armour in uncertain times, allowing you to respond in ways that your competitors can’t. For example, you’ll be better-positioned to capitalise on the “competitive volatility” associated with economic downturns.

For instance, investment opportunities, including mergers and acquisitions, usually become cheaper. “The time to buy is when there’s blood in the streets,” Baron Rothschild supposedly said in the panic that followed the Battle of Waterloo. Similarly, amidst the 2008 financial crisis, McKinsey’s advice was to “take advantage of hard times to buy the assets of distressed competitors at bargain-basement prices.”

Organisations can achieve smart working capital management by taking a holistic approach across their receivables, inventory and payables. In short, this means increasing DPO (days payable outstanding), reducing DSO (days sales outstanding), and reducing DIO (days inventory outstanding).

This may mean shortening payment terms for your customers, increasing the use of supplier credit, renegotiating payment terms with lenders, or even taking advantage of working capital finance.  

“Efficient cash flow and working capital management will be your suit of armour in uncertain times.”

Maintaining operational flexibility

When a company’s top-line performance becomes unpredictable, organisations need a certain amount of operational flexibility to maintain consistent earnings.

Operational flexibility means proactively reviewing your expenditures on a regular basis; what made sense a year ago may no longer be the best choice. Is it time to consider other options? Empower your team to ask these questions and suggest alternatives.

Operations managers may also wish to improve supply-and-demand planning using advanced forecasting techniques and order-backlog analysis. If you’re a business vulnerable to costly inventory build-up, you may even wish to switch to a “just-in-time” inventory system. Those responsible for procurement should also work to limit discretionary and tail spend, and regularly evaluate the supplier market for cheaper options.

In an age of cloud computing and AI, embracing digital transformation should be another cornerstone in your long-term flexibility and cost reduction strategy. Invest in technologies that streamline processes, improve data collection and analysis, and enable remote work capabilities. This not only reduces costs but also positions your company to adapt quickly to changing market conditions.

Indeed, the most resilient companies use downturns for a major strategy rethink. For instance, during the 2008 financial crisis, American Express cut costs, broadened its funding sources, divested noncore businesses, and embraced new digital technologies. The result? Its stock price increased over 1000% over the following decade.

Proactive financial risk management

“Make hay while the sun shines” is more than just a quaint saying—it’s a fundamental principle of sound business management.

For leaders, it may mean building large liquid reserves to fall back on in case of hardship, preserving unused credit lines, or reducing liabilities by restructuring existing loans: consolidating existing business debts into a single, lower-interest loan, for example, can reduce your monthly payments, freeing up working capital.

As businesses evolve, so do their risk profiles. Regularly reviewing and updating insurance policies ensures that coverage remains adequate and relevant, protecting your income during those nightmare “what-if” scenarios. This might include exploring specialised policies like business interruption coverage.

“Act early” and “act fast” should also be the watchwords of companies’ financial risk management strategy. History tells us that the most resilient anticipate the crisis before it materialises, actively scanning the horizon for emerging risks and acting accordingly. A proactive approach may involve regular market analysis and trend forecasting, or stress-testing business models against various scenarios.

“Make hay while the sun shines’ means building large liquid reserves to fall back on in case of hardship, preserving unused credit lines, or reducing liabilities by restructuring existing loans.”

Long-term competitive perspective

Companies that balance short-term survival with long-term planning tend to be most successful: the Boston Consulting Group found that companies with a “long-term orientation” achieved an average 4.2% avenue growth during the 2007-2009 downturn, compared to 0.3% average revenue growth amongst those with a short-term outlook.

What does this mean in practice? It means boosting the top line at the same time as pursuing efficiencies and cost reductions.

While reducing expenses and maintaining capital reserves are vital, these measures should be targeted rather than across-the-board. In the heat of a crisis, you should also focus on consolidating core business operations, and even investing in areas where there are attractive growth opportunities.

Apple is a case in point: it released its first iPod in 2001 – the same year the US economy entered a recession, inflicting a 33% contraction on the company’s revenues. Nevertheless, they continued to plough capital into their product portfolio, lifting R&D spending by double digits. The rest, of course, is history.

“A long-term competitive perspective means boosting the top line at the same time as pursuing efficiencies and cost reductions.”

Looking to consolidate existing loans or open up new credit lines for strategic investment?