Back to basics: surviving the credit crunch
As our neighbours to the south struggle through what is possibly its worst recession in 80 years, the Canadian economy braces for its own meltdown. Since the US is our top export customer, Canadian industry will be drastically impacted during the next year, according to Jim Copeland, manufacturing sector leader for international accounting firm Grant Thornton LLP.
Grant Thornton has been warning manufacturers for a couple of years that they rely too heavily on the US, and to look for alternative markets and diversify their investments.
“We saw this coming,” says Copeland. “The economy is cyclical and it has been seven or eight years since we’ve had even a moderate recession.”
Canada’s reliance on the US is understandable. Our cultures are similar and it’s the largest consumer market in the world—right next door.
But there’s a price to pay for putting all your eggs in one basket. Just look at what’s happening to Canada’s automotive industry and how it’s affecting the Ontario economy. The Detroit Three are hitting up US and Canadian governments for loans and guarantees just to stay afloat, not to mention the seemingly endless litany of layoffs and plant closures.
Copeland is not certain the slowdown’s impact has been fully absorbed: the second and third tiers of parts manufacturers have yet to report financial statements for the year.
“This isn’t over yet,” says Copeland. “I don’t think other people in Canada really appreciate how drastic it is.”
According to Statistics Canada, the manufacturing sector represented 14.5% of the national GDP or $178 billion dollars as of August 2008. Copeland warns the amount of GDP at risk must not be underestimated.
As a global credit crunch makes its way from Wall Street to Bay Street and then on to manufacturers, banks are tightening the purse strings. But this is not a time to panic. To help businesses become reacquainted with basic business practices and take proactive steps to prepare for the challenging days ahead, Grant Thornton published The credit crunch: a practical guide. Some of the key elements in the guide include: basic business practices; managing a relationship with your bank; cash flow and cost control; and managing suppliers.
Its premise is simple: if manufacturers are to survive this downturn, they need to start looking abroad and focusing on improving productivity.
“Look at Canada’s productivity numbers. They’re certainly lower than the US and most of the G8,” says Copeland. But he says it’s positive to see the Ontario Government funding the SMART program, which was created by Canadian Manufacturers & Exporters (CME) to help small and medium manufacturers improve their productivity.
For years Canadian manufacturers have built their business models on the basis of low cost, which is no longer practical. There are a number of emerging economies such as Brazil, Russia, India, Eastern Europe and China, where the value proposition is much lower cost. “Canadian manufacturers can’t compete against that. Our economy is much more vibrant. We have industry that’s been around for 100 years,” says Copeland. “Manufacturers have to learn to compete with quality products, unique processes and more innovation. They have to offer something that’s more valuable to the buyer.”
“Cash is king! If you have a company in the midst of a recession, its ability to function and continue operating is based on paying the bills,” says Copeland. Companies need to be able to keep their cash position fairly liquid in order to service liabilities. Profitability is important, but not as much as maintaining cash balances.
“Manage your cash through monitoring your receivables, and make sure you’re not extending credit loosely to other companies or customers,” says Copeland.
Recently banks have become nervous and more rigorous in their lending practices, making it tougher to get financing. And over the years, many companies have overlooked their relationships with banks. The guide says new lending will be restricted for many industry sectors and regions, and companies will struggle to refinance existing credit facilities. “Make sure the bank has as much skin in the game as a shareholder,” advises Copeland. “Treat them like a partner.”
When times are good and companies are making money, they often overlook operational costs. Protecting your personal wealth should not be left until things start deteriorating. During tough economic times, decreased demand and unstable commodity prices will force companies to cut costs and only spend where necessary. This isn’t a time to slash and burn. Understand where the inefficiencies are and eliminate them.
“Make sure you have investments other than in your business. And stay on top of your credit by only granting credit to good customers. A sale doesn’t mean anything unless you’re going to collect on it,” says Copeland.