A recession can cause a significant economic pullback, leading to reduced consumer spending, decreased business activity, and a lot of uncertainty. A well-designed strategy can soften the impact and minimize negative effects on your business.
Here are the top five things that build resilience and help you manage recessionary risk while future-proofing your business. This is your essential financial resilience guide.
During a recession, one major problem that small businesses should keep in mind is their cash flow situation.
As macroeconomic conditions get tougher, your invoices will take longer to be paid, while some might become delinquent. This means that cash coming into your business is going to slow down, or worst-case, decline.
You should put in the extra effort to collect payments promptly from customers. Make calls and send reminders to customers, if necessary.
At the same time, you should find a way to slow down your payments to your vendors within the contractual terms and conditions. Try and negotiate with your vendors and ask for more favorable terms for your accounts payables, while diversifying and optimizing your sourcing strategy to lower prices you pay for goods and services to vendors. This will allow you to keep more cash on hand as well as increase margins.
You must make sure that cash that is expected to come in, comes in sooner, while the cash that needs to go out, goes out slower. This will provide a cash flow cushion that will be extremely useful in managing volatility.
Another very important variable in managing cash flows is inventory. You must not be over-exposed in how much inventory you carry. Find a way to reduce inventory to levels that are lean and just enough to keep your sales at steady state, and to meet current demand. You should anticipate order cancellations or delays/postponements from customers.
Remember, growth can be slow to non-existent during a recession, and you may not need as much inventory on hand to meet customer demand. Keeping your inventory levels lean will ensure you are not holding up valuable cash that otherwise could be used for more important purposes.
Forecast your cash flow needs for the next 12-24 months and try to see if there are situations where you could be cash-negative so you can plan ahead and take necessary precautions ahead of time.
When economic conditions get tough, people and businesses generally spend less, which can lead to declining sales and revenues for small businesses. This is where a solid financial resilience guide becomes essential.
As a business owner, it's imperative to not only keep sales intact but also to find ways to diversify and innovate new revenue streams. This is a key part of your startup downturn planning and will help you alleviate the impact of any decline in customer spending, ensuring your top line remains healthy.
One of the most effective ways to fortify revenues during a downturn is to focus on existing customers. It's often easier and less expensive to retain a current customer than to acquire a new one.
By providing excellent service and targeted promotions, you can encourage repeat business and boost loyalty—a crucial part of recession planning for startups.
Another strategy is to expand your offerings into lower-priced items that appeal to customers with tighter budgets.
This can help you retain existing customers and attract new ones, while maintaining order size. Higher volumes, even at lower margins, can be a powerful tactic in your startup downturn planning to protect revenues.
Because generating sales is challenging in a downturn, focusing on selling the right products is critical.
Position your sales strategy to push products and services that are higher in margin whenever possible. Even with declining sales, you can maintain gross margins and protect your bottom line by implementing these profit protection strategies.
In today's digital age, a strong online presence is crucial. By leveraging digital marketing, you can increase your visibility and attract new customers. Consider investing in social media advertising, SEO, and email marketing.
Additionally, promotions and discounts can be a powerful tool to drive repeat business, such as limited-time offers, bundle deals, or loyalty discounts.
Promotions and discounts can be a powerful tool to attract new customers and incentivize repeat business. Consider offering limited-time promotions, bundle deals, or loyalty discounts to encourage customers to make a purchase and maintain a steady stream of revenue.
Expanding your offerings is a popular way to diversify revenue streams. By providing new or complementary products or services, you can attract new customers and increase the value of each customer's order.
This is a key part of effective recession planning for startups, helping you reduce dependence on a single offering.
Exploring new markets is another effective way to diversify. Consider targeting new customer segments or expanding geographically. For example, if you sell products locally, consider expanding to regional or national markets.
This helps you build a more robust business model, a crucial component of any financial resilience guide.
Subscription-based services can be a smart way to diversify revenue streams. By offering customers ongoing access to products or services you can generate recurring revenue and reduce your dependence on one-time purchases. Consider offering subscription-based services that align with your existing offerings, or ones that address customer pain points.
Managing expenses carefully is what separates businesses that survive a downturn from those that don’t. This is a common strategy for large businesses, and it's just as crucial for small businesses.
As part of your recession planning for startups, you must start by reviewing all your potential expenses over the next 12-18 months and look for ways to reduce operating costs. To execute effective profit protection strategies, you will be better served if you can separate fixed from variable costs and begin by tackling the fixed costs first.
While variable costs typically decrease with declining sales, most fixed costs do not. These fixed expenses can quickly get out of hand if operating cash flow declines, making it challenging to pay for essentials like rent and payroll. A smart financial resilience guide will tell you to tackle these costs proactively.
As part of your startup downturn planning, you should look for ways to lower fixed expenses like travel, subscriptions, and overhead without negatively impacting sales or customer relationships. Consider negotiating with your landlord or creating operational efficiencies to do more with less.
When cutting costs, be mindful of the impact on your customers. While you can reduce spending, you risk losing customers to competitors. Be judicious with any cuts that could affect the quality of your service.
Finally, put a hold on new hires or projects unless they are absolutely necessary. This simple step is one of the most effective profit protection strategies you can employ to stay resilient during tough times.
Another critical factor that needs attention during a downturn is capital expenditures. As part of your recession planning for startups, a sound approach is to limit spending on expansions, new assets, or ongoing investments unless they are absolutely necessary.
These profit protection strategies dictate that you should only approve capital investments that drive much-needed growth, sales, or positive cash flows that enable your business to cover its obligations. Furthermore, it may be beneficial to delay non-essential equipment maintenance or replacements. This helps conserve resources, minimize spending, and retain much-needed cash flow.
Despite doing everything you can to weather a storm, you may still find yourself in a situation with insufficient cash flow to meet all your obligations. This is a crucial scenario to plan for as part of your comprehensive recession planning for startups.
For this exact contingency, a smart financial resilience guide will advise you to have cash reserves set aside or a line of credit activated. Having a financial safety net in place is essential for keeping your business running smoothly and managing unforeseen challenges.
By implementing a sound recession strategy that includes protecting your cash flows, fortifying and diversifying revenue, controlling costs, limiting capital expenditures, and maintaining cash reserves, you can do more than just survive a downturn—you can thrive when things turn around.
Please go ahead and schedule a free 30-minute consultation today to see how we can help you plan, survive, and thrive.
