How to Prepare Your Business for a Recession
Running a business is no small feat in and of itself. But when news begins to spread of a looming recession, a whole new set of challenges emerge. Whether your company is consumer-facing (B2C) or serves other businesses (B2B), you can expect customers to tighten their purse strings.
The good news is that you have time to prepare. Economists can spot a recession forming on the horizon like a meteorologist can see a hurricane brewing way out at sea. You never want to sit back and wait to see what happens when the storm hits. Instead, you want to use this time to prepare and strengthen your business. Use the following tips to help recession-proof your organization.
#1: Make Cash Flow a Priority
One of the leading causes of business failures is the mismanagement of cash flow – the money moving in and out of your company. This area of your organization’s finances becomes paramount during a recession because there is usually less money coming in. That means you should prepare for the storm by solidifying your accounts receivable procedures and building a cash reserve.
Accounts Receivable: Review your current billing procedures and look for areas of potential improvement. Are you sending out invoices promptly? Do you have a collections process set up for late payers? You might consider offering invoicing discounts to entice clients to pay their bills sooner. This strategy is helpful if you pay suppliers after you receive client payments.
Cash Reserves: Similar to your personal emergency fund, you should work on building a cash surplus for your business. Ideally, your cash reserves will be enough to cover six to nine months of operating expenses.
#2: Lock-in Financing Before You Need It
It’s a great feeling knowing you’re protected should a storm hit. With a business line of credit, you’ll have that peace of mind because you can access a predetermined amount of money anytime you need it. And, if you never borrow from your line of credit, you pay nothing.
But the trick is to secure your business line of credit before the recession hits. Lenders tend to tighten their unsecured lending during economic contractions, so it will likely be more difficult to become approved if you wait.
Even if you don’t plan on getting a loan for your business, use this time to review your company’s creditworthiness. You want to make sure your business is in good standing in case you need a loan down the road.
#3: Reduce Your Expenses
No one enjoys cost-cutting, but it’s vital during an economic downturn. An effective strategy is to create a new budget for your business from scratch. Most companies work off previous years’ figures but starting anew helps you significantly trim more fat from your expenses.
If hiring more staff is on your to-do list, consider waiting until after the storm hits. Other options, such as hiring contract labor or outsourcing positions, could be just as effective but at a much lower price point.
#4: Involve Your Staff
The most dreaded word that accompanies “recession” is “layoffs.” Generally, the most expensive part of a company’s operations is personnel. Consequently, that’s usually one of the first places businesses look at when cost-cutting.
However, if you approach the situation differently, your staff could become the keystone to helping your business survive the downturn. First, be honest with your employees about any fiscal challenges. Then, ask for their input.
Do they have suggestions on how to reduce costs?
Does your accounting team have ideas on how to improve billing procedures?
Is software or equipment available to streamline operations and make the company more profitable?
Tap into the knowledge held by those that perform specific tasks daily. They can often identify opportunities that managers at the top miss. Their involvement will also help to boost morale during difficult times.
#5: Renegotiate with Vendors
If you regularly work with specific suppliers or vendors and have a positive business relationship, consider asking for more favorable payment terms. These might include:
Asking for a credit line with the company.
Extending payment dates an extra 15 or 30 days.
Providing invoicing discounts for early payments.
If your organization maintains an inventory of materials or final products, consider revisiting your ordering procedures. In times of economic uncertainty, it’s often wise to reduce inventory levels until you can better gauge short-term sales.
A common strategy is ordering smaller quantities with vendors on a regular timeline. That way, you’re investing less at once, yet suppliers have recurring sales – it’s a win-win.
#6: Identify New Opportunities
Before a recession, it’s smart to begin identifying and testing new business opportunities. Again, this is an area where your current employees could bring ideas to the table.
Because sales tend to dip during a recession, look for ways to set up recurring revenue streams. Some examples might include:
Subscription Programs: The subscription model is so popular today because it works. There are subscriptions for just about everything – from streaming services and software programs to pet supplies and toothbrushes. Look for ways to bring this model to your company.
Loyalty Programs: Offering discounts or other incentives to generate recurring sales remains a popular business move. These might include offering free products after so many purchases, discounts on annual payments vs. monthly, or cash bonuses for referrals.
#7: Continue Marketing Your Business
When cost-cutting begins, marketing and sales are the first areas executives look. It’s an easy space to cut because most people look at marketing as expenses versus investments. If you fail to promote your business during an economic downturn, sales will continue to weaken – often at a quicker pace.
If you do have to make cuts, identify the areas that generally underperform for your organization. There are many ways to digitally advertise your business today that don’t cost an arm or a leg.
We’re Here to Help!
While no one looks forward to a recession, it’s an economic cycle that is out of your control. But you can decide how you will react to the coming storm. Use this time to strengthen your business and revamp procedures to ensure strong cash flow in the coming months.
If you’re interested in securing a business line of credit or would like more information on business accounts available at the credit union, we’re here to help. Please stop by any of our convenient branch locations, visit our website, or call 540-389-0244 today.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.