If you haven’t started to prepare your business for recession yet, you’re not alone. With all the uncertainty globally and subsequent firefighting, you’re probably in the ‘think about it later camp’ or even; what recession? Having some kind of plan based on best guesses however, is better than having no plan at all. These are just some of the things you might consider as the prospect of recession becomes clearer…
It’s well known that inventory doesn’t sell through as quickly during a recession as customers begin to reign in their discretionary spending. Make sure that you’re planning for the dip in your inventory levels so that you’re not left with stock that you have to discount or worse, need to dispose of completely causing a loss.
It’s sensible to revisit the terms on which you’re happy to extend 30 to 90 day payment terms to your customers. Offering payment terms is usually necessary for small businesses to compete, however clients should be assessed much more carefully with reference to the risk of non-payment, particularly in recessionary times. Check out our tips for extending credit to customers wisely.
Just as your customers will be looking for additional time to pay, you too can ask for extended payment terms from your suppliers. If you can keep your payment terms in alignment with your receivables, this will greatly assist your cash flow.
The best time to streamline operations is before the recession takes full effect. Take a look at your key functions and identify where expenses may be reduced; that is if they’re not essential to maintaining business. This may include outsourcing and using third-party contractors or freelancers for some elements. On the flipside to this, for some businesses, securing talent may become easier during recession and that might well be the strategy to get that key hire during recession and be in the coveted position of being able to scale up quickly.
Capital intensive strategic projects should be assessed as to whether they can still yield the desired return in a market downturn. If not, you won’t want to be spending that cash and you may consider postponing until market conditions improve. On the other hand, an investment into new equipment or automation may be just what’s needed to compete and survive during recession. The same questions need to be asked of a capital investment whether in a recession or not, it’s just that the timing aspect of the evaluation; both in terms of current timing of the outlay and time to see a return, are naturally more pertinent to the decision.
Many businesses choose to cut marketing (and sales) budget as soon as there are talks of recession, this isn’t always the best bet for the business as marketing can help you stand out from the crowd and neglecting it for short-term gain often results in a vicious cycle of lost pipeline and sales.
You might have already started to notice that clients are taking longer to pay your invoices. They’re likely feeling the pinch of higher costs and lower revenue already and recession causes them to delay paying their suppliers to preserve their own cash flow. Unfortunately, if you’re not on top of this with a comprehensive collections policy, it can really sneak up and hurt your own cash flow.
Having a reserve of cash on-hand during a recession can make or break a small business. Having something set aside to cover spiraling costs or make payroll on a ‘lean’ month can help you through a difficult time. How much of a pot you need is really a question of what the financial statements tell you and business owners’ propensity for risk.
Most companies will wait until their cash flow is compromised during a recession before they look at where their expenses might be trimmed. Going through the exercise earlier may avoid the challenges worsening in a downturn. Take a look at insurances, utilities and telephone and internet and shop around where possible to bring costs down. Don’t be so ruthless that the business is strangled for growth or you enter into unreasonable contracts but no one is going to miss the monthly magazine subscription from the meeting room table.
Even if you don’t need any additional finance now, you may need to top up in 6 or 12 months’ time. Securing finance will become a lot more difficult as lenders’ requirements get more stringent during a recession. A business line of credit based on your accounts receivable or invoice factoring facility both provide flexible solutions to improve your cash flow position and aren’t generally contingent on your current position but on your potential for growth.
Take a close look at the balance sheet before the recession really bites and determine whether it’s in best interests to pay down debt or whether that will hurt the business’ cash flow even further. As costs rise it’s essential to keep a closer eye on debts and strike the right balance between eliminating interest charges and sustaining day-to-day cash flow and operations. There may also be the option to consolidate debt payments into an overall lower interest rate and payment if you’re in a stable financial position.
Of course, if you’re struggling to meet your debt obligations already, a lender would always prefer you to get in touch with them early and ask for support as opposed to ignoring the problem.
It makes sense for some companies to reduce complexity and inventory during recession by eliminating products and services that yield little profit; less products typically means less raw material on-hand and a simplified range can help reduce the burden of staff training and customer service.
Any reduction in product line should be carefully assessed by running a before and after income statement; if there is no positive impact on profit then the product(s) should remain. There are several good reasons not to dispose of products, particularly if a big client purchases that product and their spend is so significant that it cancels out a small loss. The product may also complete a product line-up and prevent customers from going and trying a competitors’ product – there are many considerations to make before eliminating unprofitable products but it can be a strategy for some businesses.
It may be that the business has customers that only purchase that one unprofitable line or order so little that it costs more to manage them and in these cases, it could be sensible to tactfully manage them out of the business. It sounds harsh but if they’re monopolizing time and not adding any revenue, it could be a sign that you need to start raising your prices to them or subtly degrading the level of customer service so that they leave of their own accord. The other aspect to consider is the impact of consistent late-payers or underpayments on the business’ cash flow – for these clients, changing payment terms to payment in advance could prevent cash flow becoming a big problem as recession hits.
At a time when things can change very quickly, flexibility to implement changes can be an enviable position during recession. In this respect, tying the business into any long-term agreements at this time, to secure short-term preferential pricing for example, could restrict ability to pivot quickly as the market changes.
It might seem like recession is too big a mountain to climb but small business owners are resilient and prove time and time again that they can survive tough times. Consider all the points above and then try to think creatively about how you might generate additional revenue streams; it may come from the places you least expect and it doesn’t have to be a long-term strategy, just something that helps you weather the storm. A prime example might be food manufacturers. In a recession, consumers tend to swap out higher end brands for a lower-cost ‘own-brand’, however if you were to introduce a more basic version of a product, with some clever branding it might enable you to minimize the loss of sales.
No business is immune from the effects of an economic downturn, unless you’re in an essential services industry or have sizable cash reserves that is. There are, however , practical ways that you can prepare your business for recession and be ready to ride the wave of the upturn when it inevitably happens.
We also appreciate that each and every business is unique, there is no one-size fits all approach to preparing for a downturn; in this respect, our list is by no means exhaustive but is intended to provide a starting point for discussion. We’re always happy to discuss your concerns around surviving the recession so soon following the pandemic – please reach out to our experienced team to discuss your next move.
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