When it comes to business planning, the best time to prepare for a recession is when things are going well. This allows you to act wisely, rather than reacting to circumstances and gives you the option to develop sound strategies to help ensure your business’s survival.
Unfortunately, recessions can be tough to predict; COVID-19, for instance, has thrown a huge wrench into the U.S. economy. While experts were predicting a recession prior to the pandemic, few would’ve imagined the extent of its effects, which continue to be felt to this day.
Now, many companies have been caught off guard and are searching for last-minute solutions to turn things around. If you are beginning to feel the pressures of the current economic climate, then allow your McAllen virtual CFOs at Murray & Kirchner, LLC, provide you some insight on how to prepare your business for a recession.
Steps to Take to Protect Yourself During a Recession
1. Manage Profitability
Most companies have a relatively narrow margin for error. A 10% reduction in revenue can eliminate the whole bottom line of your company. Having a plan to produce marginal, short-term profit despite a drop in revenues can make all the difference.
Consider doing the following:
- Implement forecasts based on optimistic, realistic, and worst-case revenue scenarios.
- Formulate contingency plans. Make sure your top managers are on board with the plans and are ready to act fast if revenues drop.
- Agree with your management team on early warning signs, including a shrinking backlog, a downturn in customer-market indices, or a worsening sales pipeline.
- Adjust discretionary spending at more frequent intervals; for instance, quarterly, or even on a rolling basis.
- Keep bankers and investors informed to discuss the actions you’re ready to take to minimize the damage.
2. Identify and Maintain Your Strengths Along With Your Best Customers
Identify the strengths that have facilitated your success to date, and those that will be crucial going forward. You’ll also want to determine your highest-margin customers and understand what you’re doing right for them. Create a game plan to protect and build on the strengths that have allowed you to be indispensable to them.
In the event of a dip in business, instead of cutting costs across the board, shift resources to keep these high-margin customers. Continue coming up with creative ways to add value for your customers without raising your costs.
3. Decide What Needs to Be Discontinued
Companies that create lasting value generally excel at discontinuing services or products that no longer add value to a customer’s experience.
Prepare to make changes in cost structure that will least hurt your strengths and will hone your value proposition down to what customers truly value. Go through your cost structure to create a contingency plan for what you would cut.
Identify what’s ineffective, what’s nice to have but that your business can do without, what’s there due to history, immobility, or wishful thinking, what may have worked in the past but no longer does, and what isn’t bringing in value as it used to.
Realize the obstacles you would face in cutting costs. Many organizations aren’t up to speed with taking costs out quickly as revenues fall, and margins suffer.
Throughout your company’s growth, your operations have likely become more complicated. Be ready to wipe out any complication that isn’t compliance-required or value-adding. Consider outsourcing non-strategic company functions like human resources, accounting, and even finance.
4. Manage Liquidity with Profitability
A downturn could force you to deal not only with negative growth but also with liquidity limitations. Trying to maintain liquidity on a smaller revenue base may be damaging to your business.
You would need a plan to turn over every balance sheet dollar quicker to contribute to working capital. A plan should include:
- Maximizing cash flow by narrowing the timing between sales and outlays for costs you incur in advance, including inventories.
- Collecting from customers faster. Consider giving out discounts for paying promptly or requiring deposits from customers.
- Taking advantage of increased supplier compliance to share risk and provide favorable terms.
- Keeping track of your receivables against your payables and minimizing your Cash Conversion Cycle days (the time it takes for money to come in from customers against the days when your supplier payments are due).
Certified Public Accountants & VCFOs Here to Help You Prepare for the Worst
The list of tasks a business owner has to do to survive a downturn can seem long and daunting. You need to avoid stripping what has made you successful while accepting the necessity of shrinking it for the near-term.
Managing through the current crisis will require disciplined decision-making. Lead with the appropriate proportions of cost-conscious frugality and hardy innovation.
Our McAllen VCFOs are here to help your business survive and succeed. Do not hesitate to reach out for all of your finance needs and concerns, especially during these difficult times.