A recession can cause significant economic pullback which leads to reduced consumer spending and decreased business activity, as well as create a lot of uncertainty and volatility in your business.
A well-designed recession strategy can help soften the impact of an economic downturn and minimize its negative effects on your business.
Here are the top 5 things that build resilience and help you manage recessionary risk while future proofing your business.
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 become tough people and businesses generally tend to spend less money. The immediate consequence of this squeeze will result in declining top line sales and revenues for small businesses.
It becomes imperative for a business owner to start thinking about not only keeping sales intact and fortifying revenues, but also to find ways to diversify and innovate new revenue streams to help alleviate any decline in customer spending.
One of the most effective ways to fortify revenues is by focusing on existing customers. It's often easier and less expensive to retain an existing customer than to acquire a new one.
By providing excellent customer service, personalized experiences, and targeted promotions, you can encourage repeat business and boost customer loyalty.
Another way to fortify revenues is by expanding your product or service offerings into lower priced items that could be appealing to customers who are reluctant on purchasing higher-end products/services.
This can help you retain existing customers as well as attract new ones while maintaining the overall value of customer purchases/order size. Higher volumes even though at lower price or margins can help with protecting revenues.
Because generating sales and revenues gets challenging in a downturn, focusing on selling the right product and service will become ever so critical.
Position your sales strategy to push products and services that are higher in margin when possible. In spite of declining sales you can still maintain gross margins and protect your bottom-line.
In today's digital age, having a strong online presence is crucial for small businesses. By leveraging digital marketing you can increase your visibility, attract new customers, and drive more revenue.
Consider investing in social media advertising, search engine optimization, email marketing, and other digital marketing channels.
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.
Expanding your product or service offerings is a popular way to diversify revenue streams. By offering new or complementary products or services you can attract new customers and increase the value of each customer's order size.
Consider conducting market research to identify new opportunities or partnering with complementary businesses to expand your offerings.
Exploring new markets is another effective way to diversify revenue streams. Consider targeting new customer segments or expanding geographically.
For example, if you sell products locally, consider expanding to regional or national markets. This can help you reduce your dependence on a single market or customer segment.
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 very carefully is what separates most of the businesses that survive during a downturn and the ones that don’t. This is something you will hear on the news every day on how big businesses cut costs and hunker down to weather the storm. Small businesses are no exception to this rule.
You must start by reviewing all your potential expenses in the next 12-18 months and think about ways in which you can reduce your operating costs. You will be better served if you can separate fixed from variable costs and start tackling the former.
While variable costs typically decrease with declining sales in a downturn, most fixed costs do not.
Fixed expenses can get out of hand very quickly if operating cash flows start to decline, making it challenging to pay rent, payroll, overhead expenses and such.
A smart thing to do is to start planning ahead and look for ways in which you can lower your fixed expenses such as travel, memberships, subscriptions, supplies, overhead, occupancy, and other office expenses, without negatively impacting your sales and customer relationships.
Negotiate with your landlord on delaying any rent increases if that’s on the cards, or try to figure out ways to lower your staffing while creating operational efficiencies with the headcount you have by trying to do more with less.
You may have to cut corners on how you service your customers without materially impacting quality of service or relationships. This is a two-edged sword. While you can reduce costs on one hand, you could also lose customers to your competitors on the other. So be cognizant and judicious when it comes to cost savings that have customer impacts.
Put away any new hirings or initiating new upgrades/projects unless it’s necessary, and you feel confident of the benefits it’s going to drive.
Hunkering down even though sounds cliché, will go a long way in helping you stay resilient during tough times.
Another very important factor that needs attention in a downturn is capital expenditures. This includes expansion plans, acquisition of new assets/equipment, or any ongoing investments in the business.
A sound approach would be to limit these unless it drives much needed growth, sales, or positive cash flows that enable the business to cover its obligations.
Furthermore, it may be beneficial to delay equipment maintenance or replacements unless it is required. This will help conserve resources, minimize spending, and help retaining much needed cash flows.
Despite doing everything you can and pulling all the right levers to weather the storm, you may find yourself in a situation with not enough cash flows to fulfill all payment obligations and keep your business running smoothly.
It is for this contingency situation that you should have cash reserves set aside or a line of credit activated.
By implementing a sound and smart recession strategy which includes protecting your cash flows, fortifying and diversifying revenue sources, lowering and controlling costs, limiting and avoiding capital expenditures, and maintaining cash reserves, will not only help you survive in a recessionary downturn, but actually thrive when things turn around post-recession.
Please go ahead and schedule a free 30-minute consultation today to see how we can help you plan, survive and thrive.