It’s no secret that as of mid-2020, the economy isn’t in great shape. In fact, according to the National Bureau of Economic Research’s Business Cycle Dating Committee, we’ve been in a recession since February, when the COVID-19 pandemic really started to gather steam in the United States.
But whether you’re reading this in 2020 or way down the line, another market downturn, correction, or full-blown recession is on the horizon — that’s just how things go. And since the next downturn is a matter of “when,” not “if,” it’s best to be prepared for when the next one comes along. Here are some things to keep in mind.
1. Cut With a Scalpel, Not a Machete
The businesses that don’t make it out the other side of hard times are the ones that overreact, usually in the form of drastic cuts. It’s easy to panic when you see revenue drying up and throw everything overboard that isn’t bolted down, but that’s not the right approach.
The biggest line item to go is usually payroll. You can save a lot of money by cutting employees, but with some serious downsides. First, those employees were presumably doing something, and now your remaining staff will have to pick up the slack. Between the extra workload and seeing their colleagues let go, your remaining employees morale and productivity are going to suffer.
Secondly, you’ll have to hire people back when things pick up again. In the long run, you’re not actually saving any money — in fact, you’re probably losing money, since you’ll have to train new staff, which takes time and resources.
The other thing that’s often cut is marketing and advertising. This is a mistake, too, for obvious reasons — marketing and advertising are the only reason that anyone knows about your business in the first place. No matter how bad the economy gets, it should still be a priority to gain new customers, which means that you can’t afford to hole up and stop reaching out.
Instead, focus on efficiency. Cut non-essential programs and luxuries like travel. Streamline processes so your employees can get more done in the same time. Stop spending money on the marketing channels that don’t return leads and pour all your efforts into the ones that do.
Prioritize Cash Flow
Even if you’re still profitable in hard times, cash flow is a serious concern. You might lose clients, which means checks are coming in less often. You might take on extra debt, which means another monthly payment going out. If you let the month-to-month expenses get ahead of you, you might find yourself underwater quickly.
Be a stickler about making sure that debts are repaid or clients are billed on time. Cut or consolidate expenses so that they don’t pile up. Change billing cycles from yearly to quarterly or monthly in order to make sure you’re covered. And above all, budget — chart out your cash flow at least 30 days in advance to make sure you don’t dip into the red.
Stick to Your Core Competencies
Every business has things that they do really well and things that they’re taking a risk on. In 2019, for example, BMW sold more than 145,000 of their X3, X5, and X7 SUVs — more than enough to make up for the relatively niche i3 and i8 models (which sold less than 5,000 units between them).
But when the belt tightens, you need to stick to the things you do best — your business’ BMW X3. An economic downturn is not the time to diversify, put money into R&D, or try to expand into new markets. Drop the extras and put all your energy into the things that have made you the most profitable.
Keep Your Current Customers Happy
We all know that it’s more expensive to acquire new customers than to keep old ones, and that’s an expense you can ill afford when the going gets tough. Keeping your current customers satisfied, delighted, and coming back for more is the best way to keep your cash flow up.
Maybe that means offering them a discount for sticking with you. Maybe it means offering referral rewards if they bring new people through the door. Maybe it just means reaching out to them to see if they need any help themselves. Showing them that you can help address their needs and solve their problems is the best way to keep them on board.
Don’t Forget to Differentiate
That last point being said, you’re still going to want to find new customers, and an economic downturn might provide you with some great opportunities to do that. It’s worth taking the time and energy to see what your competitors are doing during the downturn and looking for ways to pick up their slack. Set yourself apart as a reliable, helpful alternative, and you’ll bring in customers who feel neglected by the competition.
Keep One Eye on Your Credit Scores
When hard times hit, there’s a good chance you’ll need extra funding. If that’s the case, the time to get a supplementary loan is sooner rather than later. If you try to tough it out, letting your cash reserves dry up and missing payments, your credit score will drop and it’ll be even harder to get a loan — and if you do, you might be saddled with an unsustainable interest rate. The more you can plan your finances ahead of time, the more you’ll be able to anticipate the need for extra cash and the better your chances will be.
Talk to the Experts
Your business is your lifeblood — it’s your passion, the reason you get out of bed in the morning, and not least a significant source of your income. You need it to succeed, and in times like these, that can be more difficult than ever. But you don’t have to go it alone.
At First Western Trust Bank, we take a unique, tailored approach to each and every one of our clients. We don’t pigeonhole you based on a few broad categories like age and income — instead, we’ll take a deep dive into every aspect of your income, liabilities, goals, and values to create a financial plan that will help you weather the storm and emerge stronger than ever. If you’re ready to start taking your business finances seriously, get in touch.