Michael Vermette likes to think of the economy as a train.
Right now it might be racing down the tracks, but a bend up ahead will force the train to adjust its speed.
“Your experience on that train is quite different when it’s slowing down than when it’s just cruising along at a constant speed,” said the partner at PwC Canada’s deals practice, who also serves as senior vice-president of corporate advisory and restructuring.
“And of course if it brakes hard and starts to stop, that’s an even different experience.”
Vermette, who frequently deals with corporations facing challenges ranging from operations to the balance sheet, does not believe the economy is about to brake hard. But he anticipates a slowdown is coming and said there is “low-hanging fruit” businesses can address to prepare for declines in growth:
•Products and customers: “Take a look at your business and try to identify unprofitable products,” Vermette said. “You try to identify market segments that are too costly to push or just too problematic for your business. It may be that you can preserve 90% of your sales volume … and increase your margins meaningfully during the slowdown. So it’s not about growth anymore. It’s about preserving what you have.”
•Costs: “There’s probably not a business on the planet that can’t eliminate 1% or 2% of their cost structure just by focusing on it. And many businesses can eliminate a very meaningful part of their cost structure.”
•Communicating: “If you make a decision to pay your suppliers in 45 days rather than 10 days, that’s not necessarily a sign of weakness but it may be interpreted as such if you don’t have a conversation with them,” Vermette said. “People can perhaps draw conclusions that are not accurate.”
•Head count: “That is oftentimes a very big cost component of a company’s business,” Vermette said, adding a firm should look at where those costs are being spent and determine the value of the business units being examined. “If it’s done in an early stage of a slowdown, it benefits you all the way through an economic cycle rather than waiting to the very end when it becomes a must.”
He added a downturn generally eats up poor businesses while good businesses generally survive.
“But the great businesses thrive during those downturns because they’re able to take advantage of opportunities that are, quite frankly, other people’s misfortunes,” Vermette said.
Meanwhile, the Business Development Bank of Canada (BDC) has been in the midst of examining the potential effects of a downturn on the country’s entrepreneurs as it looks increasingly likely the country is facing a slowing economy, according to BDC chief economist Pierre Cleroux.
“We saw in 2007, 2008, companies that were able to go through the recession without too much damage in every sector of the economy,” said Cleroux, who anticipates an economic slowdown but not a recession. “So it’s not the sector, it’s not the region, it’s not the size of the company, it’s much more the entrepreneurs. It’s basically how well you manage your business.”
The BDC focuses exclusively on entrepreneurs, offering financing and venture capital to small-to-medium-sized businesses (SMBs).
Cleroux said the bank’s clients must consider different ways of managing their businesses during slower growth periods:
•Efficiency: The BDC has developed a free online tool that allows entrepreneurs to measure their productivity and compare with other businesses in the same sector.
“When the economy is performing very well and there’s a lot of growth, people are so busy to respond to the demand that they forget about efficiency and cost,” Cleroux said. “So it’s important right now for businesses to look at their efficiency levels or productivity levels, make sure that they control their costs, because as revenue is going to be slowing, costs are going to be much more important to make sure you have a good bottom line.”
•Diversification: Cleroux said some SMBs rely too much on their No.1 client, often to the point that they account for 50% of revenue.“
So when the economy is slowing down, if this client is having trouble, well, you are going to be in big trouble,” he said. “So it’s important to diversify your client base.”
And if a company exports its products or offers services abroad, it must also consider diversifying its markets as well, according to Cleroux.
•Financing: “When the economy’s slow and your revenue as a business is slowing down, it’s important to have a good base that will help you to go through it at more difficult times,” Cleroux said. “So secure financing now before a slowdown.… It’s easier to do that than in a middle of a slowdown.”
Cleroux also echoed Vermette’s sentiment that businesses must be willing to drop clients who take up too many resources in exchange for low margins.
But the economist said SMBs need to take a more cautious approach before considering cutting jobs to reduce costs.
“It shouldn’t be the first thing you do as an entrepreneur because it’s expensive to rehire people, [and] you will lose a lot of that knowledge and talent,” Cleroux said.
