Protect your company from a potential financial meltdown by diversifying your financial relationships when times are good.
We all want to feel like the Great Recession is in the rear-view mirror and the economy (sometimes sluggishly) is marching its way back to a full recovery.
The banking industry in the United States has been largely reformed and penalties are being paid out by big banks in settlements with the Department of Justice to the tune of billions of dollars.
But is restitution and slow economic gains enough? Sure, OK news is better than bad news, but is your business built to withstand the next economic tragedy?
Diversification is Your Best Friend
It’s impossible to know where the next bubble will be. The sub-prime mortgage bubble caused a domino effect that rocked the global economy to its foundation in the Great Recession. Before that, in the late 90’s, the dot-com bubble hit.
The first, historical bubble was the Tulip bubble in the seventeenth century. So, if there’s one thing history tells us, there are more bubbles on the horizon.
To limit your risk, companies need to develop a presence in multiple markets. For example, if your company develops automotive parts, then it might not be a bad idea to use your manufacturing facility to also create electronics.
Sure, you could create automotive chipsets and stay within your general market, but your goal should be to diversify out of the transportation industry.
Take advantage of what you have to cost-effectively enter an unrelated market that can act as a hedge in case your primary product’s market collapses. If it’s too challenging to enter into another market, then invest part of your profits into a diversified portfolio.
Create a Strong Relationship With Multiple Banks
If your company does all its banking with a single financial partner, you could be in for a nasty surprise when something goes wrong. According to an article on anyoption, “…there has been a 4.2 percent contraction in quarterly profits among US financial corporations.” The financial sector is struggling right now with a looming European banking crisis on the horizon.
Most bank accounts in the United States are insured by the federal government for balances up to $250,000. The National Credit Union Administration is a federal agency that oversees the operation of banks in the United States; ensuring compliance and safe business practices.
The problem is, most companies have a cash flow that places their accounts in excess of $250,000 at various points throughout the year. If something went wrong and funds weren’t available, there would be a potential for capital to be lost.
Plus, having a relationship with multiple banks allows you to virtually guarantee (with good credit history) that you’ll have access to capital in case of a catastrophic failure. In most cases of financial collapse, only a few banks are initially affected.
The other banks aren’t hurt until a few days after the initial failure, which gives you time to pull funds out before different institutions experience failures.
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Aggressively Pursue Lines of Credit
Credit is easiest to acquire when you don’t actually need to borrow. If you can show a strong financial forecast and history for your business, banks and other lenders will be open to providing credit products to your business.
Having both an emergency fund and an excessive amount of available, untapped credit is a great way to help insure your business can weather economic storms.
Make Data-Driven Decisions
One of the easiest things to do as a business owner is coast after experiencing success. Sure, your business might have a strong reorder rate and customer loyalty, but are you seeking out new opportunities based on current trends? Every time your business interacts with a customer, you add a record to your business’ server stack. Analysts call the treasure trove of information your company holds “Big Data”.
Information Week reports: “Most companies estimate they're analyzing a mere 12 percent of the data they have, according to a recent study by Forrester Research.”
Big Data can produce insights about your business and highlight areas of opportunity. The numbers don’t lie. Understanding how and why customers are interacting with your business is key to charting a profitable path into the future. Don’t get stuck in a rut doing the same things day in, day out. Focus on analyzing data to make the hard decisions necessary to keep your company agile and flexible.
If your company can get out ahead of market trends, then you’ll be less likely to be caught flat-footed in a recession. Look at data points like: average basket size, customer reorder rates, preferred payment method, preferred purchase channel, and anything else that helps you analyze your current operations. Use the data to draw out conclusions about what your customers love and hate about your service.
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If you notice a dramatic swing in credit card purchases, that could signal that your customers are having to stretch themselves further financially in order to purchase your products.
No matter what, take the time to look at the data and draw fact-based conclusions. Take action on those conclusions, even when it’s difficult, to stay current with the market.
Setup financial accounts with multiple banks and establish a presence in a diverse set of markets. You’ll find that an ounce of prevention is worth a pound of reaction when markets go sideways.
Don’t let your brand become a statistic. Prepare for the future and enjoy long-term, internal stability, no matter how rough the seas get.