Expert Strategies to Recession Proof Your Business

The familiar warning signs of a potential recession are flashing: an inverted yield curve, a decline in GDP, high inflation (8.5% in March), and impending interest rate hikes that will make borrowing money more expensive.1
Businesses may be able to weather the immediate impact of higher interest rates, especially those that have made good use of recent low interest rates and bullish stock markets. The bigger question is: how recession-proof is your business if these indicators continue on a downward spiral? What can you do right now to prepare your company’s finances for a potential slow down?

Recessions are expected, as they are part of the business cycle. The United States has had 12 recessions of varying lengths and severity in the 20th century since the Great Depression—an average of one recession every six years.2 For those companies that are strategically planning, focusing on revenue preservation and cash flow, and are investing in technology to help monitor their company’s financial health, they can withstand this potential economic downturn. Consider any of these strategies to weatherproof your company and survive the next soft economy.

1. Create a Robust Cash Flow Management Plan– Running out of cash is always a top concern for business owners, but it becomes especially concerning during a recession. Start by getting a handle on your current cash balances, monthly revenue and expenses. Create a rolling cash flow forecast for the next quarter to guide the management team and to serve as an early warning tool that alerts you to variances. Activities that can drain your cash flow include invoices that are not billed in a timely and prompt manner, customers that delay payment, and inventory that is increasing faster than sales. Establish a process to create cash flow forecasts that are continually modified and updated as new information becomes available. A forecast for the next four to six weeks will help you keep it realistic. Keeping one for the next 13 weeks/next quarter is even better.

2. Evaluate Your Staffing Needs- Layoffs and job cuts are a typical course of action in a recession, as companies seek to downsize and reduce their costs. Don’t risk customer service and product quality over a reduction in talent and support. Take stock of your current staff and their skills to ensure they align with what your business may need during a recession. Be ready to make adjustments so that employees work efficiently and are organized in a way that maximizes their potential, but doesn’t spread your team too thin.

3. Closely Monitor Your Books–  Think of monitoring your books and financial statements like monitoring your vital signs. Understanding the health of your company by utilizing timely and accurate reporting is a key tool that allows you to measure how the business is performing in terms of cash flow, sales growth, profit margin, and expense management. Key data to include in this monitoring would be common financial statements such as the Balance Sheet, and Profit & Loss and Cash Flow. Other data to review frequently are Accounts Receivable and Accounts Payable Aging, and, of course, your bank activity. Keep a close watch on Key Performance Indicators and ratios such as inventory turnover, AR days outstanding, debt covenant compliance and others that have significance to your business.

4. Create and Adhere to a Budget – Having a budget or operating plan is a best practice in any economic environment. Budgets allow a business owner to not only plan for expenses, but to analyze expenditures and make changes according to the needs of the business. Budget variance reports identify differences between budgeted and actual results. Significant variances should be researched to identify their causes and appropriate changes made as quickly as possible to re-align the business activities with its mission and goals, primarily from the Income Statement, against the budgeted amounts that were projected. Creating and sticking to a budget is a best practice that can help your business better navigate economic downturns—especially if sales decline during a recession.

5. Create a Business Emergency Fund-  Every business should have an emergency fund available. These funds can help bridge the gap in times of unexpected changes in operating circumstances. Set up an emergency
savings fund with three to six months’ worth of expenses for your business, just like you would for your personal finances.  An emergency fund can also help you with payroll and other expenses if your business is unable to sell products and services or serve your clients. For many owners, the most difficult part in the process is allocating cash from the business to save for emergency use. If you are in a situation where your emergency reserves will still not cover your losses, other options include having a bank line of credit, cutting some operational expenses or partnering with other businesses to outsource and cut down your internal resources.

6. Remove Idle Inventory- Inventory that is sitting idle for more than six months poses a major expense to your business. If your slow-moving inventory is high-cost, it can add even more troubles to your cash flow burden, which can create trouble in a down economy. How you manage your inventory will directly impact profitability. Stocking more inventory than what is needed for current sales forecast and demand means using available cash to pay for the surplus inventory. Inventory management is paramount to running a successful business. It’s a delicate balance to know how much stock to order, as too much inventory can hurt your cash flow, and failing to have enough on-hand inventory could lead to lost sales and frustrated customers.

7. Set Yourself Up with Access to Capital Now- If your business is thriving right now, it’s the best time to get yourself access to flexible financial products, like a line of credit. Get to know your banker before help is needed by
inviting them to tour your business. Continue to nurture this relationship, but also expand your banking contacts and business relationship to other banks. Meet with other lenders and consider using different banks for different financing products. Think long-term and find at least two banks with enough scale and capability to serve as partners as you grow your business—and if one day you might face a cash-flow crisis.3 Change is inevitable,
markets shift, and bankers change positions. In the last decade, alternative lenders have popped up to serve small businesses. With these new lenders, businesses have access to much more capital to finance their company’s growth. However, with new funding sources, you should still make sure that whatever financing plan you pursue makes the best financial sense for your company’s future.

Many companies today are now hiring or outsourcing dedicated CFOs and strategic business advisor roles to ensure they will be able to weather economic downturns. B2B CFO® can provide multi-scenario modeling to aid in tactical decision-making, offer an unbiased financial perspective, act as a confidential sounding board and help your company make the best decisions for long-term financial health. Contact us today to start a solid recession-proof strategy to safeguard your company.

Sources:
1World Economic Forum Annual Meeting,
https://www.weforum.org/agenda/2022/05/united-states-recession
2The Balance. The History of Recessions in the United States.
https://www.thebalance.com/the-history-of-recessions-in-the-united-states-3306011
Worried About a Recession? Do these 5 things now.
3US Chamber of Commerce.
https://www.uschamber.com/co/start/strategy/preparing-business-for-a-recession