Protecting Your Business in an Economic Downturn

Apr 3, 2020

With unemployment claims soaring and markets plunging, the risk of a major economic downturn becomes greater with each passing day.

What can you do for your business to reduce your risks?

Chad Salsbery, Managing Director, has been closely following the global impact of COVID-19 and his perspective is:

“Companies need to be proactive in not only managing their own liquidity, but also monitoring the liquidity of their customers and suppliers.”

Solvency refers to a business’ ability to meet its long-term financial commitments, while liquidity refers to a business’ ability to pay short-term obligations.

What should you be doing on a regular basis?

Monitor the liquidity of key customers and suppliers in order to identify those who may be at risk of failing to meet their obligations.

Consider taking the following steps:

  1. Gather Information: compile relevant information and metrics (e.g., A/R balances, past due amounts, and supply agreements)
  2. Contact the Customer/Supplier: attempt to get as much information as you can that can be used to determine liquidity risk, for instance, it’s not uncommon to request annual or interim financial statements
  3. Consult Outside Sources: attempt to verify the information you have received from the customer/supplier through reputable third-party sources (e.g., credit reporting agencies, SEC filings, Dunn and Bradstreet, etc.)
  4. Determine Exposure: assuming you receive no further payments from customers, what is your A/R risk. Along with this, monitor and update your Allowance for Doubtful Accounts reserve to avoid surprise adjustments at quarter-end or year-end
  5. Implement a Strategy: do you continue to sell to high risk customers, or do you implement different payment terms (e.g., cash in advance payments, shortened payment terms net 15)

These 5 steps will help you navigate the uncertain waters ahead in the current economic environment.

Chad Salsbery provides expert services in areas including insurance and construction claims, commercial litigation, and solvency opinions. Chad’s bankruptcy and financial valuation experience includes solvency reviews, liquidity and business capitalization analyses, equity funding, and SEC investigations. Notable cases include a large insurance claim related to Hurricane Katrina and litigation support services related to the Kmart bankruptcy filing.

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