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Surviving the Economic Crisis

30/04/2009


Throughout the past few years, the credit crunch in the U.S. has continued to be the topic of many conversations. Living in Canada, I will often be asked what exactly the “credit crunch” is because Canada hasn’t been affected to the same extent as the U.S.

It basically started over a year ago, when the U.S. economy was at a high. Mortgage lenders became more aggressive by offering sub-prime mortgages (i.e., loans to individuals with lower credit scores and credit profiles than a specific industry set criteria). However, once the economy started to slow and house prices began to drop significantly, there was an increase in foreclosures and losses incurred on mortgage-backed securities (i.e., a pool of mortgages sold together as security).

The effect of the economic slowdown was magnified by the accounting requirement to market investments to fair value under the financial instruments standards. This strained the operations of major banks, restricting their ability to sell off loans to make room for new lending, and eventually resulted in the fall and sudden sales or rescues of major banks.

Canada has not been completely immune from the effects of the global liquidity crunch. Although Canadian banks generally are more conservative in their lending practices and have stronger regulatory safeguards, they are still looking for greater protection against loan defaults. Therefore, the cost of borrowing has increased, and the ability for businesses to secure debt or refinance/extend their existing debt agreements, has become more challenging. Also, since the U.S. is one, if not the largest trade partner with Canada, their economic slowdown has affected our economy as well.

What can you do to ensure that you come up on top of this crisis?

Focus on cash flows and cost cutting.

  • Analyze your operations and assess the impact on liquidity.
  • Perform benchmarking analyses against competitors to highlight areas of your operations that may be improved. 
  • Strengthen credit terms offered to customers by negotiating shorter reasonable terms, and review and monitor their credit-worthiness. 
  • Attempt to obtain the most favorable credit terms from suppliers and negotiate discounts for early payments. 
  • Reduce stocks of inventory and replenish on a just-in-time basis. Sell obsolete inventory at a discount. 
  • Cut spending on discretionary expenses, such as travel and entertainment expenses. Do not automatically cut marketing expenses as you need to maintain your competitive position and market share, especially for when the market rebounds. 
  • Pay tax, payroll and GST/HST remittances on time to avoid large penalties and interest, but ensure that you are making payments as late as possible (i.e., if qualify, make quarterly instead of monthly tax installments). 
  • Only invest or expend cash on maintenance of assets that are vital to the operations of your business. Consider less expensive financing options, such as leasing, factoring, etc.

Will this crisis last for years? Only time will tell, but Canada’s top economists are predicting that it could last until almost 2010. By staying on top of what is happening in the outside world and how this affects your business’ liquidity and cash flows, you will be able to weather the storm.

For more information on how MNP can help your business survive the economic crisis, please feel free to contact me or your local MNP advisor.