Ask the Advisors – What to Do About Unstable Oil Prices?

Jennifer Mailhes is a shareholder in Doeren Mayhew’s Houston CPA firm.

With oil prices still unstable, I’m concerned about a drop-off in business. What should I be doing now to prepare for a potential downturn?

The answer is to run some scenarios. You want to determine if you have enough cash flow to operate during a downturn, and quantify the impact of any decisions made during this time.

One of our clients recently considered shutting down a slow-moving division, until scenarios revealed it would cost more than $300,000 and simply slowing down production made more financial sense.

You most likely did budget planning in the fourth quarter of 2014, and you were probably planning for a high-growth year. Revisit the budget and determine any adjustments that need to be made for the remainder of the year. Make sure you have a flexible budget that rolls ahead so you can see changes and react to conditions.

Also look at break even and make necessary adjustments. Run short- and long-term cash-flow projections as well. Be proactive in looking at where you could adjust costs if needed. Take a look at bulk purchasing commitments and scale back where appropriate.

How long will it take for me to start seeing the impact of any cuts I decide to make?

Longer than you probably think. Expect most changes to take about 60 days before you start to feel them. In the case of cutting staff, for example, severance pay or paying out unused vacation will eat cash for a good while following any layoffs.

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Jennifer Mailhes, CPA, is a shareholder in Doeren Mayhew’s Houston office and can be reached at 713.789.7077. For more information or assistance navigating unstable economic conditions, contact our CPAs and business advisors in Michigan, Houston or Ft. Lauderdale.