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A recession can have a strong impact on businesses, and some industries are more affected than others, but every business is affected in some way. When the nation is in a recession, people generally spend less overall, which means there is less money coming into local businesses.
The seriousness of the impact depends on the industry and the length of the recession. During a recession, people are less likely to spend money on things they consider luxuries, so these industries will be affected more seriously. One of the first industries hit is hardware wholesalers, for example.
There are also industries that continue to thrive whether there is a recession or not, such as the fast food, tobacco, alcohol and cosmetic industries. Regardless of whether you think your business can withstand a recession or not, it’s important to have a plan B and prepare for anything that could happen.
Preparing for a recession is good for businesses in any industry. You don’t want to be caught by surprise when the next recession happens. Instead, by preparing carefully, no matter the external economic changes, your business can continue to operate as closely to normal as possible.
There are a number of tips you can use to help prepare your business for a recession. Using them may not mean everything will be run perfectly, but they can help you manage your business more effectively and minimize damage to your company. Here are my seven favorite tips for recession planning:
Keep as much cash on hand as possible.
We typically recommend having at least three months of operating cash on hand at all times, but if you’re preparing properly for a potential recession, aiming for six months of cash is preferred. This will help ensure you can maintain your company’s needed standard procedures, even if your revenue decreases. If your business doesn’t have enough cash on hand, losing revenue may keep you from operating effectively.
Keep a cash flow forecast (updated weekly) for at least 13 weeks out.
You need to keep an eye on how much cash you are spending and give yourself time to adjust your plans, if needed. Updating the forecast weekly will help you see how the recession is changing your company’s finances. Knowing how much you can spend in various areas and where you need to pull back is crucial.
Have a backup plan for your business that includes access to capital, if needed.
During a recession, you may have to adjust how you operate — having a backup plan can help with that. Even when you update your forecast every week, things can change unexpectedly. Your backup plan will help keep your business on an even keel. There are a variety of backup plans out there; you can always rely on having a larger-than-necessary line of credit in place, having investors ready to go and knowing which higher-interest lenders are willing to lend to you.
Keep up with customer payments.
Don’t let your invoicing get behind. If customers aren’t paying for your goods and services, you can’t keep up with your financial obligations. When that happens, it doesn’t matter if your industry is recession-proof; you may not be getting paid on your invoices as routinely as you have in the past. If you have strict rules in place for when your clients need to pay you, you can stay ahead of potential late payments.
Diversify your customer base.
To survive the recession, it is important to reduce the chances your entire customer base will be negatively impacted. When you diversify your customer base, you won’t be relying on only one source of revenue. Diversification increases the chances that your income will stay closer to normal as you weather the storm. Put your clients in a pie chart; if you have any one customer that takes up a majority of the pie, you should change that. Your business will be affected by how well they do, and it’s never good to allow another company to control the success of your business.
Know what your margins are and where your profits are coming from.
Knowing what your margins are at the customer level is crucial. For a professional services company, you also want to know your margin by employee and your utilization by employee. For a product company, you need to know which products are making money and which are not. Knowing which revenue line items are more profitable than others allows you to direct your focus more specifically. Also, always know what impacts your bottom line, including your ongoing general and administrative costs, and where you can (and can’t) cut expenses. Knowing this information ensures that you have all the data you need to make decisions and adapt to changes.
Keep a close eye on your budget.
Insist that your accounting team (typically a controller) provides you with a budget and actual reports on a monthly basis. This will help you identify where you are over budget and where you still have some wiggle room. It’s paramount that you’re able to identify problems quickly so they don’t have a big impact on your business.
The most effective way to recover from a recession is to prepare appropriately. Whether a recession is projected to greatly impact your business or not, preparing for such an event will help your business continue successfully for years to come. If you pay attention to the items above, you are more likely to survive a recession and come out on top.
March 8, 2019 at 08:15AM
Forbes – Entrepreneurs