Preparation gives your business the best chance of surviving a recession. While it might feel like doomsday is near, there are many strategies you can deploy to minimize the fallout.
By the same token, failure to prepare for recessions can force your business to make rash decisions in response to stressful economic conditions.
We’ll cover the best ways to plan so you can weather the economic downturn. More importantly, we’ll share strategies for taking advantage of the many opportunities that emerge during or after a recession.
1. Build a Cash Reserve
Maintaining a healthy cash flow can protect your company against financial downfall. You can improve your cash flow by strategically being mindful of the expenses and increasing profits.
Consider building a reserve to cover three to six months’ expenses. This amount allows you to continue paying employees, contractors, vendors, and other people involved in your business operations.
2. Consider Business Financing
Financing offers you the cash flow flexibility you need to manage a recession. You should consult with a CPA to review your business financials and make a cash flow projection for the upcoming 12 months.
Having a detailed understanding of your company’s financial health is critical to determining the best type of business financing option for your situation. Here are common types of loans to consider:
- A line of credit can help with gaps in cash flow or ongoing operational needs such as utility bills or rent.
- Equipment financing helps to upgrade your company’s machinery or technology.
- A term loan is good when you need capital for a significant purchase.
- Invoice factoring is an excellent solution if a lot of cash is currently tied up in accounts receivable.
Financing allows you to build a cash reserve while still taking new orders. It’ll give you the financial help you need, especially to pay off your fixed expenses.
3. Manage Payments and Invoices Strategically
During a recession, some of your clients may take longer to pay. As a result, this has a trickle effect, impacting your cash flow and reserves. You can minimize delayed payments by managing your payments and invoices carefully.
For example, only offer 30-day or 60-day terms to clients with excellent credit. Check their commercial credit reports every three to six months to ensure they still pay their vendors on time.
You’ll want to implement a system to collect overdue invoices as well. Draw up a contract that gives your client 30 to 60 days to pay their existing invoices. Have your lawyer draft this agreement and ensure it outlines all deliverables, time frames, payment expectations, and dispute handling procedures.
4. Examine Expenses
Cutting costs is one of the most effective ways to survive a recession. You’ll want to perform a thorough expense audit where you analyze every recurring expense and determine whether it is necessary. Then consider whether you can get the product or service at a lower cost.
It’s essential to eliminate or reduce operational costs for items that won’t harm your business. You may want to switch to a more affordable payroll provider or temporarily scrap the office happy hour events.
Also, look for money leaks, areas that can drain your reserves. These are spending that often go unnoticed, such as a virtual storage subscription you don’t use or high job turnover due to inadequate training. Eliminating unnecessary expenses can free up cash for marketing efforts and operating expenses.
5. Manage Debt Carefully
Your organization must balance the benefits and risks of keeping debt on your balance sheet. High debt levels could ruin your partnership with the lender and put you out of business. However, paying down debt can look good on paper, but it affects your cash flow. Examine your company’s financial situation and revisit forecasts regularly.
Companies with a lot of debt can be vulnerable, especially if variable interest rates on their debt are increasing. However, if you have a great deal on your older debt, it may make sense to hold onto the debt and pay it off slowly. Always consider the interest rates and maturity dates when determining how to pay off your debt.
6. Focus on Customer Satisfaction
Customers are the lifeline of your business. Without customer retention and loyalty, your business won’t last long, no matter the economic condition. Times of financial uncertainty like recessions provide an excellent opportunity to build strong relationships. If you can add value during these challenging times, they’re more likely to stick around and never leave you.
It’s critical to consider how you can offer solutions that better address their needs. Read your company’s online reviews or send out surveys asking for their feedback. Speak with customers directly to get feedback on where you can improve. For example, you can reduce delivery windows and offer them better deals on your service or more product options.
Securing repeat customers allows you to sustain your business long-term and will help you gain referrals.
7. Focus on Marketing Effectiveness
Many business owners will stop their marketing efforts once the recession hits. However, you should always continue marketing and never stop it completely. Instead, you want to reevaluate your marketing strategy so that all distribution channels have a positive ROI.
Rather than focusing on many marketing methods, try putting resources into strategies with a strong track record for success. SEO, email marketing, and social media ads are all great marketing methods in today’s digital era. These methods allow you to target your ideal customers and track every dollar spent.
For example, a small business can continue publishing organic content and growing its email list. This free traffic source can snowball and gain an extensive email list of potential customers.
8. Optimize Inventory
Managing inventory boils down to accurately forecasting your incoming sales and cash flow. Too much inventory reduces your cash better saved as reserves or spent on other opportunities. Too little inventory can result in low sales and loss of customers.
If you’ve determined that you have excess stock, you can cost-cut by downsizing to a smaller warehouse space or renegotiating a better rate with your landlord. Additionally, you can cut costs by finding cheaper alternatives. Look into sourcing materials from cheaper suppliers. You can also reduce tariffs or transportation costs by switching to a local supplier. The key is to cut down on excess inventory and find cheaper suppliers, which gives you more significant margins for other areas.
9. Diversify Your Offerings
One of the pillars of a successfully run company is its ability to diversify. A diversified revenue stream means you’re not putting all your eggs in one basket. Depending on the business model, you may want to shift your focus to products that appeal to your existing client’s demands.
You should look to expand your offerings through diversification. For example, consider expanding your product line to offer different products and services at various price points. Low-entry products are a great way to get new customers’ foot into the door without the cost being a barrier.
You can also diversify by adding related products to your current customer base. Some customers may have been minimally affected by a recession. Having related products to upsell can increase your customers’ lifetime value and give them a more holistic solution that covers their needs. For example, a software company might upsell their client base on a form of “done-for-you” service to help them implement the software and offer training to their client’s staff members.
Need Help Prepping Your Business? Give Us a Call
With GDP declining as recently, many are wondering whether our economy is in a recession or not. With signs indicating the United States economy is entering a recession, business owners must take swift action to make their businesses more resilient.
Just as there aren’t any guarantees in life, taking the above steps won’t guarantee that your company will come out of recession scot-free. However, it will likely minimize its adverse impacts on your business and position your organization to thrive long-term.
At MI Tax CPA, we offer free tax and accounting consultations to help forecast your future finances and make better business decisions. Call us to schedule an appointment today!