Economists are buzzing about the threat of an impending recession. Their concerns aren’t unfounded. The Federal Reserve cut interest rates this summer for the first time since the 2008 financial crisis, and yield on the 10-year Treasury note dropped below the two-year yield several times in August.
That’s not to say a recession is a given. Many economists see signs for optimism — most notably, consumer confidence remains strong and unemployment low.
At best, the market pundits can make well-educated guesses about what’s to come. Time will tell if we’re truly headed toward another lull. Still, any clear-thinking business owner would do well to prepare for the worst.
Business leaders have to be ready to weather the storm when a recession hits.
Your Recession Survival Kit
Most businesses don’t emerge unscathed from a recession. But careful preparation can mean the difference between landing in the recovery room or the morgue. Give your business its best shot at survival with these five strategies.
1. Diversify revenue.
Recession has a way of spreading through the supply chain. It could hit any of your buyers before you, and their problems quickly become your problems. That’s why your revenue shouldn’t be heavily dependent on a few customers.
Look over your customer mix. If any single buyer represents more than 10% of your business — or your top five clients together account for more than 25% — you need to diversify.
There are plenty of options for expanding your customer base. You might broaden into other markets or ramp up your marketing budget for next year. Find ways to forge a variety of new relationships and add many small revenue streams.
2. Reduce expenses.
When times get lean, you’ve got to know what you can live without. Every entrepreneur should be able to spot the small indulgences that are eating away at profits without stimulating growth. Knowing the difference between what’s discretionary and what’s essential is critical.
“Any time there is financial instability (whether it’s due to the economy or company shortfalls), the first step is an obvious one: reduce discretionary expenses,” says Sabina Gault, CEO of Konnect Agency. “This is the time to re-evaluate your company policies for travel, per diems, and office supplies.”
She adds, “Most companies’ highest expense after salaries is paying leases and bills for their office space. During a recession or other financial strain, look to see if you can sublease some of your space to offset those costs that must stay. Finally, look at vendor output and decide if you can hold off on online advertising, web design, accounting, or other miscellaneous services.”
It’s possible to go too far with this — marketing is important, even in the direst circumstances. Nonetheless, you should scour every line item and trim the budget where it makes sense.
3. Sock away some money.
When it comes to recession preparation, conventional wisdom for personal finances applies to business as well. Who knows when your cash flow might dry up or banks might tighten up on lending? You need a healthy emergency fund to weather a downturn.
Even a startup should integrate plans for an emergency fund into its business plan. Keep a separate account for savings so you’re not tempted to dip into it for standard expenses. Your target balance will depend on the size of your business, its volatility, its revenue, and its margins. Consider it a good start if you have enough to cover three to six months’ worth of expenses.
4. Keep inventory low.
Take a walk through your warehouse. How much cash is tied up on your shelves? That’s cash that will be much harder to liquidate during a recession.
Learn to think lean about inventory, even to the point of bucking trends within your industry. Tesla is a prime example: The auto manufacturer has rejected the standard auto sales model and essentially makes its cars on demand.
You might not be able to go that far, but ask yourself how much you really need on hand to meet demand. This might require more advanced methods of tracking, but the rewards in liquidity are worth it.
5. Manage debt.
Debt compounds quickly when budgets tighten, so pay it off while you have the cash. If you’re following the first four strategies, you should have cash to put toward paying down your debts faster. Start by knocking down your higher-interest loans first, then move to the others.
It’s also important to manage debts on a relational level — both what you owe vendors and what customers owe you.
“It’s often difficult to cultivate relationships in the world of finance and credit and is even harder in a B2B enterprise,” says Matthew Debbage, COO of Creditsafe Group and the CEO of Creditsafe USA, a global business intelligence firm. “However, building relationships can be the single biggest factor in your organization’s successful avoidance of the bankruptcy domino effect.”
Recession may be looming, but there’s still time to dodge that domino effect. Businesses that are proactive in managing their finances will be set for success, regardless of when the next storm comes.
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