Deleveraging is an inevitability that your long-term business plan must take into account. Here’s what it means for you.
The era of financial deleveraging is upon us. Prepare yourselves for higher unemployment, lower economic growth and an emphasis on paying down debt that may last for decades. This isn’t the first time in history that major economies have gone through a deleveraging cycle. But as business owners, it’s important to understand what specific implications we can expect. It’s an inevitability that your long-term business plan must take into account.
Negotiating with suppliers may become easier
In past deleveraging cycles, one area where companies have cut costs is inventory. Maintaining significantly lower safety margins, focusing only on known-sellers and stretching out payment terms are typical strategies to improve cash flow. As a result, raw material suppliers and wholesalers are going to see reduced sales and profitability. They will be more willing to negotiate prices and terms. In previous deleveraging cycles, information technology was nonexistent—or very rudimentary—when it came to inventory management. Today, sophisticated technology exists that allows for real-time inventory management. This will exacerbate the problem for suppliers as companies push towards having the thinnest of safety margins in their warehouses and stores.
Showing them the money will become par for the course
As the deleveraging cycle continues, many executives will become overly cautious about with whom they conduct business. Customers may want proof that your company has sufficient cash available to stay a going concern during the life of your agreement. Suppliers may start to require certain minimum cash balances before extending credit. Strategic partners and distributors may begin conducting very thorough due diligence. They will expect to see proof that your company has the liquidity to produce results. It is very possible that large corporate customers and suppliers begin widespread use of financial covenants in contracts similar to what banks require when loaning money.
Being acquired may be a less realistic exit strategy
As large companies focus on deleveraging, they become more cautious with regard to acquisitions and pricing. They do not want to risk overpaying. Many large companies will focus on improving the efficiency of their operations as a way to increase the amount of cash they produce each month, cash that will go towards paying down debt and building reserves. Risking a significant portion of this capital on acquisitions is something many will refrain from doing. In order to be acquired, you may have to consider lowering your price or structuring payment models based on post-acquisition results.
The psychology of business will change
During this period, the overall business mindset will change from let’s do what we can to win to let’s do what we can to not lose. The willingness to take on additional risk for more gain will be muted. Companies will put a giant moat and a fortress-like wall around their cash positions. For them to use it, the reason will have to be very compelling and offer minimal risk. Expect much longer sales cycles, especially with large companies,
