Ask Andi: How do we prepare for the unexpected? 2011 was looking up. Then things hit a wall in February. Clients stopped buying and stopped paying, and prospects stopped looking. What can we expect this year?
Thoughts of the day: Prepare for the unexpected is an action step. It’s planning for the future. Your perception regarding the first quarter of 2011 is what a lot of folks experienced. The first quarter can always be tricky. Preparing for unexpected bumps can pay a lot of dividends.
Prepare for the unexpected
The first quarter, 2011, started on a good note. 11 non-manufacturing industries reported growth in December 2011. There were still delays in ordering goods, but inventories were down and suppliers were cautiously increasing prices as order backlogs grew.
The unemployment rate dropped steadily from December 2010, falling below 9% by March, and continued down in April 2011. Companies needed more workers to help gear up production as inventories hit a new low and orders cautiously grew.
But all was not rosy as the first quarter unfolded. As we totaled up the losses of 2010 – 157 banks closed – the bad news continued – 40 more banks closed between January and April 2011. Many banks were not lending. Some said a double-dip recession was imminent. The middle class struggled, taking lower-wage jobs if they could find jobs at all. U.S. home values fell sharply in the first quarter as the number of underwater homeowners hit a new high.
Unexpected events can be a shock
February snowstorms raged across 2,000 miles, from the Midwest to the Northeast, downing power lines, grounding airplanes, and closing highways. The Japan earthquake of March 2011 had impending consequences, from delaying the supply chain for many importers, to the loss of customers for exporters. April tornado outbreaks in the Midwest disrupted business across many states.
What quietly happened in the first quarter of 2011, as it does every year, also hurt the fragile economy. By the beginning of April, companies had an extra payroll to deal with – the natural result of 13-week quarters. Not a big deal, if companies planned for it. But many companies were cash strapped and had to scramble to make the extra payroll, just as their owners were scrounging around for money to make their April 15 deadline for the 2010 year-end tax payments. Suddenly, it was as if cement were thrown into the pipe. Customers stopped paying, and accounts receivable shot up. Orders slowed dramatically. Costs were cut in favor of making tax payments.
By May 2011, the impact of all the first quarter stresses was showing. The unemployment rate was back up over 9%. It stayed over 9% through November 2011.
Plan, prepare, prevail, so you’ll be ready no matter what
So what’s coming this year? The unemployment rate is back down under 9%, an indication that somebody is hiring. Weather, so far, is milder than last year. Banks are lending if companies can produce strong financial reports. Foreclosures have slowed, but have a long way to go, as pressure has increased on banks to work out solutions. Backlogs of inventory remain low, creating demand for goods all along the supply chain.
Many companies did what they could in 2011 to put reserve funds aside as their sales ticked up. March – April 2012 will still have an extra payroll, and taxes will still be due by April 15, but the hope is that increased business activity and reserves will cushion the blow more this year.
What can you do to protect your company? Be careful to build up reserves. If your company still has loans to pay down, you’re not alone, most companies do. Don’t be in too much of a hurry to pay them off. Make sure you also build up cash for expected, and unexpected events.
March-April is right around the corner. Get an extra payroll set aside. Meet now with your accountant to get an estimate of what will be owed in taxes. Keep your eye on the ball, building relationships with profitable customers that can pay their bills and fuel your company’s future. Build a budget so you can see what’s coming.
