Debt is a useful tool that, when the economy is strong, enables companies to grow and expand. But in times of economic turmoil, over-leveraged companies relying on debt to fund their business are particularly vulnerable. With interest rates on the rise, payments on that debt may grow – which may prove challenging for these businesses.
It goes without saying, then, that companies with a heavy cash balance and a low debt profile are in a strong position to ride out economic crises. Thanks to their greater flexibility, they can more easily stomach losses or depressed earnings.
But beyond this, there are a number of things companies can do to protect themselves and weather the storm:
- Ensure capital structure is shored up
Companies should stay mindful of their debt position. They must consider many factors including the debt maturity dates, the interest rates on said debt, the costs associated with refinancing, and ultimately how this all can impact business moving forward. And, crucially, look at it over a long-term horizon, and not solely focus on just the near term.
- Mitigate input costs
Input costs are the set of costs incurred to create a product or service, including manufacturing and transportation. If these are rising at a faster pace than sales, that will have a direct impact on a company’s margins. The answer? Diversification.
Businesses should ask themselves a few key questions:
1) Do our inputs only come from one company?
2) Do we source suppliers from multiple locations?
3) Do we work with domestic suppliers or could we source globally?
- Consider opportunistic decisions
Buying up large quantities of goods, such as steel, when prices are depressed could be an opportunistic move for certain companies. It’s only with hindsight that we get a full picture of when prices have bottomed, however, employing this strategy could prove effective in managing input costs. While there is a cost to inaction, it’s essential that companies remember the risks involved in hedging – it requires making an educated and informed decision on the future price of a good.
- Know customers’ financial position
Businesses need to know their customers to discern that they have sufficient working capital and/or liquidity to get them through hard times. This means having access to their financial statements on a regular basis, and understanding their banking position and any associated covenants that could squeeze liquidity. It also means keeping a close eye on any debt maturities that could have an impact on working capital.
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