I suggest the number one ‘right’ question business owners and their advisors need to ask today is: Does your business currently have a strong enough balance sheet to enable it to survive and prosper through at least two years of recession?

Prior to readers answering that question in the context of any given business, I further suggest they focus and reach conclusions on the following supplemental questions:

1. Does your business have unused borrowing capacity available if funding to bridge a business downturn is required?
2. Does your business own assets redundant to its operations that could be liquidated if necessary?
3. Can your business significantly improve its operating discretionary cash flow by achieving labor, material, overhead or other cost savings within its current cost structure?
4. Does your business have well-maintained capital equipment that will not necessitate large capital expenditures in the foreseeable future as a result of un-remedied wear and tear?
5. Irrespective of the state of maintenance of the current capital equipment of your business will your business likely face major capital equipment requirements as a result of ongoing technological advances?
6. If your business is likely to face technology-related major capital equipment requirements is the timing of that spend going to occur earlier than you previously anticipated?
7. Does your business have significant contingent environmental, unfunded pension or other liabilities that may negatively affect its long-term viability?
8. Is your business subject to declining operating margins and after-tax discretionary cash flow in an increasingly competitive business environment?

Answer/Commentary

In our current and prospective economic, business and societal environment for most businesses continual review of balance sheet strength needs to be a, if not the top business owner priority. This where balance sheet strength at any given point in time means in:

1. the first instance that a business has an adequate yet efficient level of working capital to meet its business plan.
2. the second instance means that a business is not over-levered. That is, the business does not owe more than an appropriate amount of third-party interest-bearing debt given its asset base and its current and expected annual operating before- and after-tax discretionary cash flow.
3. the third instance ensuring a business is financially positioned to be able to survive significant both anticipated and unanticipated external and internal economic, industry, and company-specific events.

In our current environment, I suggest the importance of balance sheet strength can’t be underrated. This given prevailing economic, business and financial markets uncertainty that follows from, along with other things:

1. We have not experienced a period of recession (defined by economists as two consecutive quarters of gross domestic product growth decreases) in most of the developed countries for over a decade. It is virtually certain that we will face recession at some point. This where history and current economic indicators suggest for many that recession will come sooner than later, but inevitably will come.
2. Ongoing globalization issues, threats of de-globalization, continual government bickering over and disruption to international trade agreements and tariffs – principally emanating from the U.S. Oval Office policies, arguably have taken on a life of their own.
3. Increasing evidence that Central Bank so-called quantitative easing policies introduced in and after 2008 are not generating central bank anticipated economic growth in many countries.
4. The U.S. currently accounts for about 25% of world gross domestic product. Disruptive and polarized U.S. politics and polarized international and national policies largely emanating out of the White House, combined with the continual “Mueller cloud” that hangs over Mr. Trump’s Presidency, are economically and societally disturbing within the U.S. and elsewhere.
5. Government debt in many developed countries including the U.S. and Canada continues to escalate with no end in sight. I suggest that in particular this cumulative debt escalation, required infrastructure updates, climate change, and escalating societal issues inevitably must result in increased government regulation, increased business taxes, and other increased monetary levies on both privately- and publicly-held businesses.
6. Business consolidation in most industries continues apace. this threatens many smaller companies as large companies enjoy efficiencies as a result of critical mass, changes to supply (inputs) and distribution chain management, and a greater opportunity than smaller companies will have to exploit new and advancing technologies to their advantage.
7. Ongoing technological advances that many believe will result in significantly increased unemployment and societal disruption. If you haven’t read the 2013 Oxford University Study titled The Future Of Employment: How Susceptible Are Jobs To Computerization I suggest you do that.
8. An environment where if financial institutions were deemed ‘too big to fail’ in 2008 they are in 2019 even bigger and more influential. This where those financial institutions influence, if not as a practical matter control – the equity trading and investment markets.

In summary, I suggest business owners need to focus on the current and prospective efficacy of the balance sheet of their respective businesses – preparing for the worst while hoping for the best.