How to Prepare Your Business For a Recession
January 24, 2023
Financial prognosticators agree that a recession is coming but disagree on the timing. Some think it is already upon us or at best will hit early in 2023, while others predict it will be at the end of 2023 or early 2024. In the US, the Fed’s primary focus now is lowering inflation. They are not trying to prevent a recession — something they seem certain is inevitable.
Preparing your business for a recession is possible, but business owners need to take immediate steps to lessen the blow.
What Companies Should Do to Prepare for a Recession
The coming recession has the financial world anxious, and rightfully so. But companies should not just wait for the worst. The following suggestions can help minimize the damage from the expected economic downturn in 2023.
Compile a Cash Reserve
Companies already have a cash reserve on hand, but they should build on it if possible. Six months of operating cash is the average, but a year’s worth will give them far more security in uncertain financial times.
First, business owners should determine the minimum needed to operate each month. These calculations must include the mortgage or lease, inventory, utility bills, employee compensation, etc. If a company needs $30,000 to operate each month, businesses should try to build up a $180,000 – $360,000 reserve. If reaching that figure is not feasible, one should save as much as possible.
One effective strategy for building a solid reserve fund is to save 10% – 20% of each week’s income earned. The goal is to raise that percentage gradually until you put a significant amount away in your emergency fund.
Companies should find ways to cut back on expenses without harming product or service quality. Executives can look at their most significant financial outlays first since these offer ways to save money without affecting client satisfaction. For instance, they can see if suppliers offer early pay discounts. They can then analyze which tasks can be outsourced to save labor costs. Finally, companies could offer services instead of cash to some suppliers to further reduce monthly outlays.
Employee salaries must also be considered. Company leaders should analyze employee compensation at all levels, including raises and bonuses, and make necessary adjustments to their 2023 plans.
Work Out Financing Options
Preparing your business for a recession means being proactive. Management should inquire about financing options before the recession hits. They can operate more freely if they can access the cash they need during a difficult operating period. Companies can have their assets appraised and work out financing options with vendors. They may want to restructure current loans to give them more favorable terms. In short, prepare for the worst.
Perform a Risk Assessment
Performing a risk assessment is one of the best ways to prepare a company for a recession. Companies need to analyze how a financial downturn will affect them. How many clients can they lose and still function? What price points can be tolerated, and which ones will cause unfavorable effects? Also, they need to weigh any reputational risk from “cutting corners.” Quality needs to be maintained.
Focus on Invoices and Collections
Companies can protect themselves by implementing better invoice and collection management before the recession. Clients will begin paying their invoices more slowly when times get more complicated. Sending invoices promptly and following up after 30 days will help keep the cash flowing and prevent a slide toward delayed payments of 60 days or more. Providing an electronic option for early payment can also improve your cash flow.
Manage the Current Client Base
Companies may acquire new clients during a recession, but they should concentrate on protecting their current client base. Studies have shown that it can cost five times as much to acquire a new customer than to keep a current one. Weathering a recession depends on keeping that group happy by asking for member feedback, offering them discounts, and rewarding their repeat business. Companies will get word-of-mouth recommendations and protect their business reputation by focusing on their current clients.
How to Prepare Your Business for a Recession: Final Thoughts
A recession in the next year seems inevitable, but the exact timing and severity still need to be determined. It will affect business operations and profit margins, but companies can limit the impact by taking steps now. They should build a cash reserve, analyze risk, cut operating expenses, and more before the downturn affects their bottom line. Keeping current clients satisfied is vital, as is upping invoice and collection efforts.
What companies should do to prepare for a recession is clear. Solid planning is essential to surviving the recession in good financial shape. An expert financial partner such as First Western Trust will help businesses minimize risk, weather, and even thrive during the coming recession.