From the course: Corporate Finance: Profitability in a Financial Downturn

Corporate finance priorities

From the course: Corporate Finance: Profitability in a Financial Downturn

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Corporate finance priorities

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- In an economic downturn, companies need to set priorities, and it's especially important that they set financial priorities. Sometimes this looks like triage, and it's because companies need to do more with less as they boost productivity in order to try to boost profitability. As companies lay out their strategies for a downturn, there's four critical rules to keep in mind. Rule number one, don't run out of cash. If you still have cash, you still have a business. If you run out of money, you don't. Rule number two, focus on cash flow. This should be a high priority because if you have positive cash flow, you won't run out of cash, which is rule number one. Rule number three, to make sure that you boost profitability as high as possible. If you have high profitability, that's good for cash flow, which means you have cash and your business is fine. Rule number four is to keep your shareholders as happy as possible and potential new investors as happy as possible. After all, they could be important for the success of your business in the short run and the long run. It's important to get serious about your financials in a downturn because revenues decline, overall business activity falls and profits can erode quite quickly. All of that threatens the ability of your business to be a going concern. And even though recessions tend to be short, they can be quite painful. And it's important to hang on during a downturn because recovery and growth will follow in the business cycle.

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