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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 to come.
According to the National Bureau of Economic Research (NBER), a recession is defined as a significant decline in economic activity that’s spread across the economy and lasts more than a few months. Recessions can have far-reaching impacts on society and can lead to individual and organizational financial problems. While economists have improved at predicting recessions, they have not improved at predicting the severity and length of recessions, making it difficult for business owners and individuals to prepare on short notice.
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.
Since 82% of businesses fail due to cash flow mismanagement , this is one of the most important aspects of surviving a recession. Strong cash flow management includes both following up on past-due invoices from clients and creating an emergency savings fund. Try to keep the equivalent of three to six months of expenses in an emergency cash fund.
Another way to protect your cash flow is to manage your receivables. You should have legal contracts in place regarding late fees to reduce the risk of outstanding balances going unpaid. You may also want to consider collecting deposits for high-paying jobs upfront to reduce the risk of nonpayment. While it might seem fine to let loyal clients get a few months behind on invoice payments, staying up to date with these helps you prepare for a recession and avoid operating at a loss.
Throughout the course of a recession, small businesses may need to ask for financial help, even if it’s expensive. Don’t think of this as a sign of failure. Instead, try to get ahead of the curve by securing financing before you actually need it. You’re much more likely to be approved for a business line of credit when your company profits are going well, so do what you can to qualify. If you apply in the middle of a recession, it’ll be harder to qualify so it’s an action item worth pursuing in advance.
One of the best ways to prepare your business for a recession is to carefully examine your expenses. Look for any areas where business expenses can be reduced and try to do this as early as possible. The more time that passes with your SMB operating at increased efficiency, the more money you’ll save and the more prepared you’ll be in case of a lasting recession. Examine your costs and determine how to increase the variability of expenses or decrease overall expenses. Transitioning to a professional employer organization (PEO) or human capital management (HCM) platform can help you increase the variability, while cutting unnecessary expenditures can help you decrease overhead costs.
Take the time to look into your current staffing situation. You should have the right leaders in place to maintain focus on the goals and priorities of the company. Do what you can to retain your top talent. You should also inquire about whether your teams are being productive and delivering at the level they need to be to advance your goals. Opportunities to outsource and make your operations run more efficiently from a cost perspective, particularly with a solution that provides HR consulting expertise, can help you scale wisely to mitigate the need for downsizing. In addition to working with a PEO, there are several automation options SMBs can explore to get the best practices guidance they need.
If you have an employee assistance program (EAP) as part of your benefits program, remind employees of the EAP and any other wellness initiatives. EAPs are benefit programs that offer short-term counseling, referrals and other mental health services to employees who are having challenges with work-life balance. It’s a confidential resource that can help your workforce process any changes or learn effective ways to manage anxiety. Recessions are stressful times and employees can benefit from having this resource available to them.
You can also provide further financial help to their workforce, resources and guidance can go a long way. Some employers offer financial tools as a part of their benefits and wellness offerings, such as retirement or 401(k). If your company has this type of assistance available, tell your employees how to access it. These are often overlooked, resources that you can promote to your employees.
Loyal customers may reduce their spending, but if you have a good relationship, they’re going to stay committed to you instead of turning to competitors. If you find that most of your business comes from one or two clients, it’s a good idea to consider expanding your services to new prospects. This helps reduce the risk of eliminating your entire cash flow if one client pulls back on spending during a recession. Another action item is reviewing how you evaluate the credit worthiness of clients and customers. If you do business with individuals who may not be able to pay their invoices, it may cause problems for you later on.
Every recession presents a unique opportunity for businesses to expand and diversify their offerings. Try to think of innovative products or services that you can promote to expand or diversify your offering, without raising business expenses. Leverage technology or automation to improve business unit economics. Keep an eye on what your competition is doing, maximize organizational efficiency and explore new markets.
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 but you’ll thrive.
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