Recession-proof Your Business Before the Next Downturn
Most financial experts and business economists agree that the U.S. is due for a recession. In June 2019, a survey conducted by the National Association for Business Economics estimates the risk of a recession by the end of next year at 60%.
October is a great time to develop next year’s financial plans for your business. With the potential for a recession rising, it’s a good month to think about how to recession-proof your business.
We list below some of our top six tips for getting your company’s finances and cash flow ready for a downturn in the market.
Tip 1: Focus on Growth
Lock in long-term contracts with clients. Approach your best clients to see if you can extend your contract or expand the scope of work you do for them. Also, double down on prospecting for new business. If your business is dependent on just one or two main clients, it’s very important to diversify your base. Any new business you can land before the economy softens is gold. It is far easier to retain clients than it is to get new ones in a down market.
Tip 2: Pay down your business debt and build a cash reserve
If you are carrying a lot of debt, pay that down as much as possible. Cash will be king during a recession. Any liabilities you can reduce now will put you in a stronger position in tighter times. For more information on managing and improving your cash flow, visit this post.
Tip 3: Establish lines of credit
When a recession hits, banks tighten their criteria for providing business loans. Money is plentiful now. Banks are more likely to approve your business for a line of credit when times are good for you and your bank. Banks are more willing to loan you money when you don’t need a loan than when you do. To provide your business with a safety net during a recession, talk to your banker about establishing a business line of credit. Once it is in place, don’t tap into the line of credit until you truly need the money.
Tip 4: Watch your key performance indicators (KPIs)
As we discussed in our recent post, you should continuously monitor the financial health of your business. Pay particular attention to Accounts Receivable. A slip in your A/R turnover could indicate that some of your customers are starting to see a slackening in their business. If you do see a slip, talk to the customer and discuss the issue. Use gentle communications to avoid alienating your good customers. If you can work with them, they will stick with you.
Tip 5: Trim Fixed Costs
Take a careful look at your non-essential fixed costs. The year before a recession is a good time to reduce some of your fixed costs. For example, you could shop around for cheaper insurance or reduce office space that you are not using. Look carefully at the costs that help you win new business or retain staff. Don’t cut costs that are critical to providing service or winning new clients. You will need loyal customers and employees when the market turns.
Tip 6: Invest in Productivity-boosting Technology
But wait: how does increasing technology expenses align with reducing costs? Some technology spending can reduce your operating costs. For example, new computers can make employees more productive. Some mobile apps make it easier for employees to submit expense reports. Consider technologies that make your core processes more productive. Here is a link to a recent Inc. article on technology that can help boost small business productivity.
Do remember the adage: You cannot cut your way out of a down market.
If you need help with any accounting issues as you prepare for next year, please contact us.