From Cutting Costs to Collecting on Payments, How to Survive an Economic Downturn
Since the coronavirus outbreak, we’ve seen the sharpest economic contraction in modern history with a staggering 32.9% drop in the GDP. As a business owner, you may be suffering from the effects of the extensive economic downtown and wondering what you can do to weather the storm. Here are nine tips to help recession-proof your business. While these ideas might not make your business immune to the effects of the dramatic dip in the economy, they might help you to survive these challenging times.
1. Focus on your Core Business
A recession is a time when you should be focusing on what you do best. Look at the products and services you sell and determine which of these are the most profitable and more straightforward to deliver. An economic downturn may not be the best time to experiment with new products or innovate product developments. You want to be focusing your resources and energy on what you know will create the most profits right now.
2. Cut Back on Overhead
Do not wait until you cannot pay your suppliers. Look at your accounts now to see where there might be savings to be made. There can be a time lag between you deciding to cut back and the cutbacks taking effect. There might be notice periods on some contracts, for example. Reducing costs may not help your cash flow for some time because you have credit terms with your suppliers
3. But, Do Not Cut Back on Marketing
Consumer confidence will be lacking during a prolonged recession. As a result, finding new customers may be a challenge. When you are looking for areas to save some money, try not to cut back your marketing significantly. If anything, you might need to be thinking about how to expand your marketing to reach new customers. Whatever approach you decide to take, it will take more, not less, marketing to bring in the same number of new customers during a recession.
4. Take Good Care of Existing Customers
Existing customers are going to be one of your most valuable assets during an economic downturn, so take care of the customers that you already have. Keep in touch with customers and look at inexpensive ways that you might improve customer care. Even your most loyal customers will be looking for ways to cut back their costs. So, you do not want to give any customer a reason to start looking at your competitors.
5. Review Inventory Management
Look at the inventory you are holding and at your reordering policies. A warehouse full of stock will be of little use to you when you need cash. Explore the possibility of buying inventory cheaper, and consider buying less, more frequently. A recession is a time of uncertainty, so there will be no guarantee that fast-moving inventory items will be as fast-moving as they once were. Your business will need to be agile and adaptable if it is going to survive a recession. You do not want to be holding a vast inventory of items that you cannot shift.
6. Speed Up the Collections Process
Unfortunately, there are always causalities of a recession, so you will likely experience some delays in payment of your invoices and bad debts. You can lessen the risk of your business being affected by the misfortune of other business owners by being diligent with your collection processes. Do not wait until a sales invoice is severely overdue before you chase payment. Start your collections process as soon as invoices become due. Remember that 30 days’ credit means payment should be made within 30 days. It might even be prudent to send a gentle payment reminder to customers when invoices are about to become due.
7. Maintain Good Relations with Your Creditors
Do not hold back on paying your creditors if you do not need to. You might think that paying creditors late will give you a cash reserve. Still, that course of action can backfire if cash gets exceptionally tight. It is better to pay creditors on time whenever you can and keep up a good relationship with the people to whom you owe money. The goodwill that paying people on time generates now will help you negotiate terms with creditors later if you are facing a financial crisis further down the road.
8. Stick to 30-Day Planning
No one can accurately forecast when a recession will end. For that reason, long-term financial planning may be more challenging during a severe economic downturn. You would be better off managing your business month by month and re-forecasting where necessary based on the prior month’s results. Managing your cash flow during a recession is likely to become a regular task, too. Ask your accountant or bookkeeper to start preparing daily or weekly sales and cash figures for you.
9. Talk to Your Bank If You Need to
Finally, do not leave it to the last minute to talk to your bank if you are experiencing extreme financial difficulties. And do not forget to keep your accountant informed of your situation as well. No one benefits if your business fails, so do not be afraid to seek help and advice when you need it. You will not be the only business that is looking for help during a recession.
The Bottom Line
There is no way to guarantee that your business will be recession-proof. Even so, the above tips will help you prepare for a downturn in economic activity. Weathering a recession comes down to making the precautions that you can and keeping your finger on the pulse of your business throughout the tough times that may lay ahead.
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