Yes, It Is Possible to Prepare Your Business for a Recession. Here's How. If the economy starts to falter, you should be prepared for a worst-case scenario. Here's how.
By Nate Nead Edited by Chelsea Brown
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Current economic indicators show signs that a recession could be on the immediate horizon. And while experts don't anticipate it being a prolonged recession, it'll still come as quite a shock to many business owners who have been able to grow at a comfortable pace over the past 10 to 12 years. Thankfully, there are ways to prepare for what is (possibly) to come.
Business fundamentals remain true regardless of whether larger economic conditions are favorable or in decline. However, there are certain tweaks and adjustments that must be made in order to weather stormy periods like the one we're preparing to face. Here are six tips to help you help your business prepare for an economic winter:
Related: 9 Smart Ways to Recession-Proof Your Business (Fast)
1. Build a cash reserve
The first step is to build out a cash reserve. Conventional wisdom says to set aside a minimum of six months' worth of basic business expenses to help you weather stormy conditions for a while. However, if you have the ability to set aside more cash than that, it's highly recommended. A year's worth of cash gives you a lot more wiggle room.
When calculating your cash reserves, consider how much money you need to keep your business operational. Cut away all of the extras, and focus on the required expenses like debt payments, lease payment, utility bills, inventory, etc. If it costs you $20,000 to stay operational, multiply that number by six months, and you'll need $120,000 in cash. For a full year, you would need $240,000.
If you rely on things like factoring or outside financing, it would also be good to connect with those contacts to be sure the capital well doesn't dry up. Heading into choppy waters is also a good time to start establishing new relationships for potential alternative funding sources.
2. Get serious about managing invoices and collections
Outside of sales, nothing matters more during an economic downturn than properly managing and collecting invoices. As the economy slows and a recession sets in, you'll notice that customers start to pay their invoices slowly in order to protect their own cash. If an account was paying in 30 days, it might be more like 45 days now. And those who were paying in 45 days, might take 60 days. The key is to stay on top of them. If you don't do anything, your invoices will slip to the bottom of the pile. By sending invoices promptly and following up regularly, you can get paid faster and keep your own cash flow moving.
3. Cut all non-essential expenses
Now's the time to cut all non-essential business expenses. Anything that isn't absolutely integral to generating revenue or sustaining your business has to go.
When stripping away non-essential expenses, make sure you're clear on what this actually means. It's easy to assume something like marketing is optional, but this is a dangerous mistake. Marketing might not always show a direct ROI, but it's one of the catalyzing factors in your ability to stay relevant and compete for dollars in your industry. It's okay to cut back on certain aspects of marketing, but don't disregard it altogether.
4. Renegotiate with vendors
If you're worried about cash flow, now is a good time to get ahead of the curve by renegotiating with your own vendors. Remember that your vendors are likely struggling too (or will begin to struggle once a recession hits). They'd much rather keep you as a customer than lose your contract. Use this leverage to potentially get better rates or payment terms. It's also possible that you could get a discount for paying in cash or for early payment.
Related: How to Help a Business Thrive During an Economic Recession
5. Downsize and outsource
As tough as it can be to make a call like this, downsizing your team might be the most helpful and appropriate thing you can do. It's one of the quickest ways to shed thousands of dollars off the books each month. You can even replace these employees with outsourced help.
Outsourced contractors may cost you just 50 to 60% of what a full-time employee costs. Not only that, but you can "hire" and "fire" them as much as you want. If business does slow down, you aren't on the hook for a full-time salary. But if business picks back up, you simply make some phone calls and assign the work.
6. Listen to your customers
Avoid the temptation to make decisions in your corporate bubble. When a recession hits, the needs, desires and pain points of your customers evolve. It's important that you pick up on these changing attitudes, so that you can adjust your own branding, products and services to reach them where they are.
First off, make sure you're asking customers for feedback. Secondly, you must listen to the feedback they give. Thirdly, act upon it. This may require you to adjust your products and services, add new features or restructure certain terms. Be flexible!
Related: You Can Beat the Next Recession: Here Are 5 Companies That Did Just That
The most successful companies find ways to thrive in any economy. Whether larger economic conditions are positive or negative, they find ways to stay profitable. That should serve as an encouragement to you. Prepare the right way, and you won't just survive — you'll thrive.
