As a company owner, you have likely been dealing with all the effects of inflation lately — the prices of raw materials have skyrocketed, shipping costs are way higher than usual, business commutes now weigh much heavier on your bottom line due to astronomical gas prices, and the list goes on. You have likely been hoping for a respite, but unfortunately there may be another big problem on the horizon: a recession.
Periods of vast inflation are often followed by a recession, where consumers spend much less because they dealt with increased prices for too long. A drop in profits can really hurt any business, so how can you prepare for this possible scenario? In my experience as the CEO and founder of CMA Exam Academy (a certified management accountant exam review program), I have discovered these must-know ways to prepare a business’s finances for a recession:
Remember that cash is king
When your usual customers choose to cut back on spending, this means you will likely see a lot less monthly sales than you’re used to. However, your business will still need to be able to afford all of its monthly overhead expenses, such as payroll, utilities, payments for software subscriptions, rent for an office (if you have one), etc. So it is absolutely essential to ensure your company has strong cash flow and cash reserves to sustain it during a recession. Funds will need to be readily available to keep your business running smoothly if sales drop.
This means that there is no better time than now to start directing a much greater portion of profits into your cash reserves. If you’re considering long-term capital investments, it would be in your best interest to evaluate the level of cash outlay you’ll need to commit and its impact on your day-to-day cash flow requirements.
Cut overhead costs NOW
As stated above, a positive cash flow and strong cash reserves will be pivotal to help keep your business running well during a recession. And if cash inflows drop in a recession, then it will be paramount to focus on decreasing cash outflows — this will keep much more cash in the company’s coffers in case of an emergency. One way you can do this is by cutting operating costs as much as you can now rather than later.
This will look different for every business, but start by looking at what is absolutely necessary to keep your company running smoothly. This could include a CRM platform, SEO tools, accounting software, and the assistance of all of your employees and/or contractors. Then decide which expenses you can lower or get rid of. Can you ship products with materials that cost less? Can you eliminate a cloud-based file drive you no longer need? Can you switch to less expensive raw materials without affecting your products’ quality?
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Automate processes with software
One surefire way to cut operating costs is by implementing software applications that can automate processes, thus lowering expenses in the long run. For example, rather than paying for a pricey call center to answer customer service phone calls, you can implement an automated phone answering system that can answer every single incoming call, answer basic questions and direct calls to appropriate personnel. Or, instead of paying an assistant to send invoices, you can automate the invoicing process with software like Procurify.
There are SO many software solutions that can be used to automate your processes, so start by doing a basic Google search on the process name + “automation.” You will likely see a lot of ads for a number of software apps, so do your research to see which one is the least expensive but has great reviews and can handle your business’s needs. You can chat with representatives to see if they offer any potential discounts. Also, it wouldn’t hurt to see if there are any online promo codes you can use for a software purchase.
Optimize every department as much as possible
A recession is truly the time to optimize operations, accounting, customer service and all other departments. Find ways to streamline processes and cut costs across the board, but ensure that they won’t impact company growth, customer service or employee morale. This may mean switching up all projects so that every employee is in charge of tasks they would truly excel at. Or, you can implement a new weekly video meeting to help keep everyone in the loop about project deadlines and allow team members to ask each other questions and get immediate feedback. This would help eliminate time-wasting back-and-forth emails.
Last resort: Revisit bonuses and salaries
If you foresee your business struggling during the recession, then you may have to revisit and put a temporary freeze on all bonuses and salary raises. However, it will be paramount to be absolutely transparent about the situation with all employees who are affected so that they understand the need for the freeze. This can help prevent frustration, a drop in employee morale and costly turnover. Explain that the freeze on bonuses and raises is only until the economy gets out of the recession and the company is able to afford it again. Also, see what other benefits you can offer to employees in the meantime, such as half-days on Fridays.
To wrap it all up
A recession may be just around the corner, but you can ensure your business stays profitable with a bit of planning. Prepare your company’s finances by making sure you have positive cash flow and strong cash reserves available for an emergency. Also, cut overhead expenses now, automate processes with software and optimize every department as much as you can. Finally, as a last resort, revisit and put a temporary freeze on all bonuses and salary raises just until the recession is over. Taking these precautionary steps should help your business’s finances and bottom line stay strong throughout a possible recession.
