A recession is a period of low economic activity that transpires every few years. No matter how strong an economy is, there will be a recession after a run of prosperity.
So it is not a question of ‘if’ it will happen. Instead, it is a question of ‘when’ it will happen.
As a business owner, you should brace yourself for adverse conditions by learning how to recession-proof your business.
Small businesses, in particular, are highly vulnerable to recessions since they don’t have the resources to withstand the shock of low consumer demand.
In reality, there is nothing that can make your business altogether avoid the effects of a recession. But by adopting the steps mentioned below, you can make your business more resilient to the shock of an economic downturn.
You may be able to curtail your losses with these steps and save your business from becoming the next casualty statistic.
Let’s take a look at the measures that can help your business survive or perhaps thrive in a recession.
Table of Contents:
Enhance Your Cash Flow
No business can do well without adequate cash flow. Healthy cash flow is what makes it possible for businesses of all kinds to execute their daily core activities.
However, the reality is that your cash flow can be restricted when the going gets tough. Therefore, you will have to implement strategies to protect it.
Keep an eye on your receivables and ensure that they are paying you on time. Depending on your circumstances, you should also think about utilizing the time frame that your creditors have given you to pay back your dues.
You may want to consider delaying payments that are close to the deadlines if the cash flow is restricted.
Lease Substantial Assets
Instead of buying certain substantial assets, you should consider leasing them. The benefit of leasing is that you can make relatively small payments over an extended time frame rather than paying a colossal amount all at once. Paying a huge sum in one go can make a dent in your cash flow.
Another useful tip is invoice factoring. This involves selling off your unpaid invoices to a factoring firm. The factoring firm will give you cash immediately in return for the invoices.
The amount you will get will be slightly less than the aggregate value of the unpaid invoices. This small discount is the fee of the factoring firm and may well be worth it if you are having problems recovering debts from customers.
The factoring firm then takes on the task of recovering debts from your customers. This is not your concern, however, since you already have your much-needed cash.
Strong Financial Management
Another critical point to consider for generating healthy cash flow is strong financial management. Although there are many facets to financial management, one crucial tool is the use of financial ratios and numbers.
Make sure to calculate and follow these numbers diligently because they are an early warning system that will alert you when things are going wrong.
These numbers are often the best way of predicting an impending economic threat. So when you see that the numbers have started moving in the wrong direction, you can be sure that something is wrong and that you need to take quick action.
You need to follow different numbers like average profit margin, current ratio, quick ratio, debt-to-equity ratio, interest coverage ratio, and several others.
These figures reveal not just the overall financial health of your business; they can also pinpoint the weak areas so that you can discover the problem and formulate a solution accordingly.
For instance, the interest coverage ratio helps calculate the ratio of a company’s operating income to the interest expenses. A ratio exceeding 1 is the ideal figure.
But if the ratio starts slowly edging towards 1, it is a sign of trouble.
It means that the interest payment is consuming more and more of your operating income. Soon, you might have trouble making the payments.
You should draw up a simple spreadsheet that shows the movement of these ratios in the form of a graph. You will have a visual display of your company’s financial health in an easily understandable format.
Better Inventory Management
Inventory management can be a challenge because you have to cut inventory expenses without dropping product and service quality. You will have to consider several questions to enhance inventory management carefully.
Are you stocking up too many items at once?
Are you spending lots of cash on too many slow-moving goods that remain stuck in your warehouse for a long time?
Can you get a better supplier who can offer you more discounts and better service?
Can you eliminate paying for storage and transport costs by ordering directly from the manufacturer rather than through a wholesaler?
You will have to take bold steps and think about getting a better supplier, especially under adverse scenarios. Just because you have done business with a particular supplier for a long time does not mean that you can continue to miss out on discounts from better suppliers.
If you try going elsewhere, then perhaps your current supplier may offer to negotiate better terms in your favor.
Just like financial management, you need to follow the numbers for sound inventory management. One key number to follow is the inventory turnover ratio.
This shows how long it takes to sell your inventory. You can calculate the inventory turnover ratio by dividing the cost of goods sold with the average inventory level.
A higher number indicates that your inventory is selling quickly, while a lower number indicates that you are stockpiling inventory rather than getting rid of it rapidly. Follow this number over a passage of time to keep track of how fast your inventory is moving.
If you notice that this number has just started moving in the wrong direction, then you will be alerted and thus be in a position to take quick action to prevent the situation from spiraling out of control.
You can take immediate short-term measures, such as offering decent discounts on products that are not selling fast enough.
Bolster Your Core Competencies
While diversifying may be a good idea in some cases, you must weigh the relative pros and cons to determine if it works for you.
You should widen your product or service offering if you are confident that doing so will not stretch your business. The extras should not lead to a drop in your core business offering.
It may be tempting to offer more products and services to your customers. However, you should be careful.
Diversification is often a good tactic, but adding more products and services is not the only way to diversify. It is better to be a master of one good trade rather than to be a jack of all trades.
You should be cautious while including more products and services into your offering. Make sure that your business is fully capable of handling the increased load and has the expertise as well as the resources for these extras.
Quite often, the best way of moving forward is to focus on a few core business activities that are your forte.
You should devise strategies to gain more customers.
Your value proposition should be such that customers are motivated to move away from your competitors towards you. Offer your customers a deal that they will not be willing to pass up.
To do this, you will have to research your competitors to determine their strengths and weaknesses. This way, you will get a better idea of how you can improve your products and services to attract more customers.
Don’t hesitate to use the tactics that have made your competitors successful.
But you should not be satisfied and become complacent by emulating your competitors. Think about how you can build upon these tactics and innovate.
One of the best ways of beating the competition is to provide excellent customer service.
Try your best to engage your customers in the most courteous manner possible so that they stay with you and even spread a good word about you. This is an excellent way of reaping the rewards of free publicity.
You should strive not just to meet, but exceed customer expectations. If you can satisfy your customers, they can even become your unpaid sales force and help your business to grow.
Your goal should be to engage as many customers as you can when things are going well. Having a broad customer base is much better than having limited customers.
If your customer base is small, then your business will suffer, even if you lose a few of them. With many customers, you are widening the safety net for your business.
Even if a few customers were to leave due to the precarious situation, your business wouldn’t start floundering.
Attention on Existing Customers
While focusing on acquiring new customers, you should not lose sight of your loyal customers. These customers are valuable because they represent significant revenue both in the present and in the future.
The reason why they are so lucrative is that your business will earn a lot from them in the future–if you manage to retain them in the first place.
Gaining new customers, on the other hand, requires considerable expenditure on marketing and sales campaigns. The best sales prospects are often your existing customers.
You can try different tactics to entice them to buy more from you. For instance, you can include a rewards program that benefits loyalty.
Whenever you are marketing a great new product or service, you should first target your old customers. They are already interested in your business and will, therefore, be most likely to buy from you.
Don’t Cut Down on Your Marketing Budget
During times of economic adversity, business owners are continually looking for ways to reduce their expenses. Their marketing budgets often take a hit because the underlying assumption is that it won’t hurt your ability to perform core activities.
However, tough economic circumstances are the times during which you need to maximize your marketing efforts to attract consumers to your business.
You will have to be smart about it and consider the best avenues that can yield the best results. Don’t just start placing cold calls at random; instead, do your research so that you can discover consumers and businesses that can benefit your business.
Maintain Good Credit
During recessions, it is much harder to get loans. Ironically, loans become scarce at a time when you need them most.
But this is the hard reality of credit during economic downturns. Hence, you must maintain a good credit rating so that you will have better chances of getting limited loans that are available.
This is easier said than done because credit ratings quickly go downhill due to difficult circumstances.
You should, therefore, be wary and take all possible measures to safeguard your credit score. Having access to quick cash on credit is more important than ever during recessions.
It can be the difference between survival and liquidation for your business. But this is possible with a good credit score.
It’s not just financial institutions that will scrutinize your credit rating more carefully during an economic downturn. Vendors and suppliers are also very selective when it comes to credit rating because no one wants to provide goods and services that will not be paid in full.
Therefore, your creditworthiness matters not just for loans, but also for doing business.
By learning how to recession-proof your business with the steps outlined above, you can weather the storm and make it through the recession on a strong note.
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Preparing for a recession shouldn’t be too much of a stretch outside of your normal business operations, assuming you’re running your business correctly. However, placing an extra focus on certain areas can help you weather a recession storm and stay competitive while other businesses struggle or completely fold.
Also Read: How to Invest During a Recession