Five simple tips to recession-proof your business.
A pandemic, high inflation, supply chain issues, and the possibility of an impending recession have made it clear that preparing your business for the unexpected is vital.
Canadian economists forecast a recession this year but state that the Bank of Canada (BoC) is actively working to avoid or lessen its impact.
Whether or not a recession is on the horizon, small and medium-sized enterprises can only gain from recession-proofing their businesses. Here are five simple tips that you can use to prepare.
Key Takeaways
A recession is defined as two consecutive quarters of negative Gross Domestic Product (GDP). Still, other factors can come into play, such as a rise in the unemployment rate or consumer debt
Recessions are more manageable for businesses with a cash reserve, a strong credit profile, and low cash outflow
Staying informed, analyzing cash flow, improving cash reserves, reducing expenses, and planning are a few efficient ways to prepare and weather your business from the impacts of a recession
How to Prepare Your Business for a Recession
While recessions are typically foreseeable, even professionals find it challenging to forecast what impact they will have on the economy. There’s no one-size-fits-all approach to a preparation strategy, but here are five tips any business can use to prepare for hard economic times.
1. Stay Informed
Economic downturns are often foreseeable due to various recession indicators, such as a decline in GDP, rising unemployment, an increase in national debt, or a decline in production.
Staying informed can help you foresee these trends and can help you prepare your business, develop an understanding of where your business stands, and predict how much time you have to prepare.
2. Analyze Cash Flow
According to TriNet, 82% of businesses with cash mismanagement issues fail. Since cash inflow and outflow can change dramatically during an economic slump, Canadians usually have less money to spend.
Performing a long-term and short-term cash flow analysis beforehand and creating a cash flow statement can help outline your potential profits and expenses for months ahead.
A cash flow statement can also show you where to trim unnecessary expenses. It will also help you understand how much you can contribute to reinforcing your cash flow reserve, which is pivotal if a recession lasts longer than expected.
3. Reduce Expenses
Reducing monthly expenses that do not impact the business can help you free up money.
One common way of achieving this is by reducing your accounts receivable risk, along with renegotiating payment and credit terms with your vendors and customers.
Reducing your expenses will free up capital to build or improve cash reserves.
4. Build or Improve Cash Reserves
Building a cash reserve or improving upon an established one is essential for small and medium-sized businesses, as it creates access to liquid assets and eliminates the need to borrow capital.
Start building or improving a cash reserve with a target in mind in correlation to your monthly expenses. Setting a goal can include all the immediate expenses you require your business to operate.
Meeting a reasonable monthly goal will help you build or improve your cash reserve.
5. Create a Strategy to Increase Profitability
Recession-proofing insulates your business from the economic impacts, but finding ways to increase cash flow will help fill in the gaps if you have to cut costs.
This is the part where business owners can get creative. Some of the leading methods of increasing cash flow can include:
Offer new products or services to new and existing customers, or find tactics to upsell, cross-sell, or diversify
Creating an online store and expanding your customer outreach through various digital marketing methods, such as newsletters, paid advertising, social media marketing, and SEO
Network with other businesses online to promote yours, especially to businesses not affected by the recession, if possible
Final Thoughts: How to Prepare Your SME for a Recession
There’s no better time than the present to start preparing your small business for a recession. While surviving a recession can seem challenging, even daunting, recessions are manageable in most cases.
And, if things take unexpected turns, you can always consider government grants or business financing products, such as business loans or lines of credit with reasonable interest rates, to help you maneuver economic uncertainty or any other events beyond your control.
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