The only certainty in business is that there’s uncertainty. Covid-19 showed us that we need a plan for the unexpected, and while there’s no way to plan for everything, it’s crucial that you have emergency funds, understand your cash flow, and have an agile business.
On top of this, we're also hearing a lot of buzz around recession.
In a poll conducted by the National Association of Business Economics, a staggering 72% of economists expect the U.S. to be in a recession by the middle of 2023. Even if these expectations don’t materialize, here are six ways you can prepare your business for what could become a more challenging time.
1. Create a detailed budget and forecast
Financial literacy is crucial to overcoming any obstacles in your way in the near future, even if a recession hits. You need to have a complete and detailed listing of:
- Money coming in
- Money going out
You can use your last few months' averages to determine your current budget. Now, you need to transition to creating a forecast. What-if scenarios are great here because you can answer important questions like:
- What if sales slump 30%? Will I need to lay people off? Where can I cut back on expenses, etc?
- What if my business soars next June? Can I hire more people? Can I add to my cash reserve?
When you plan for whatever may occur, you’ll be better able to withstand any uncertainty that comes your way.
2. Build a cash reserve
What do your cash reserves look like? The median small business owner has a 27-day buffer in cash. Is this enough of a cash reserve for you? That’s up to you. However, as a CPA, I recommend having three to six months' worth of cash set aside if possible. That way you have time to adjust as needed.
3. Focus on cash flow
Cash flow is one of the most important statements to monitor for your business. If you’re cash flow-starved, it can make it difficult to take advantage of growth opportunities or stay in the game when unforeseen circumstances arise.
You should start to focus on cash flow now while your business is running well.
Cash flow maintaining strategies to consider
- Pay by credit card. Credit cards allow you to withhold cash payments. Using Melio here is crucial because you can pay by credit card, get points back, and Melio will pay your vendors with their preferred form of payment. For example, if your vendor wants to be paid by check, Melio will send them one on your behalf, even if you paid with a credit card.
- Make it easy for customers to pay you. With Melio, you can easily send your customers invoices and enable them to pay you.
- Maintain an open line of credit. This ensures you have emergency funds for times when cash flow is lacking.
- Review your customer contracts. Are some of them paying on longer than ideal terms? If so, reevaluate them. You can even consider offering ways to encourage faster payment, such as a discount.
- Discuss your options with suppliers and vendors. You may be able to negotiate better deals for your business or even extend terms by 15 days to allow for enough cash flow to pay your debts comfortably.
- Cut back. Review your expenditures and try to find ways to cut back on your overall expenses.
- Review all of your products and services. This will ensure you’re earning enough from each to remain profitable. If you haven’t increased your pricing recently, now would be a good time to evaluate doing so. This is also a good time to consider dropping underperforming products or services.
4. Examine and assess operating costs
Optimizing your operating costs may make it easier to weather the storm if we fall into a recession. Your business may have expenses that aren’t critical to growth. Reducing or eliminating these costs may make it easier to keep your doors open if a recession hits.
First, sit down and examine your operating costs. Then, assess each cost to see if it can be reduced or eliminated.
Technology can help reduce your operating costs by streamlining repetitive tasks and handling processes that take up a lot of your team’s time.
There are some costs your business simply cannot eliminate, but the right technological solution may help reduce them. Melio, for example, can streamline many tasks and make it easier to manage your business through:
These features free up time and resources while reducing your operating costs.
When cost-cutting is necessary, make sure that you have a plan to make the process as smooth and stress-free as possible.
5. Secure financing before you need it
When circumstances change, having access to cash is crucial. That’s where lines of credit and loans can be lifesavers. Securing financing before you need to use it means you’ll have quick access to the cash you need without jumping through hoops.
Developing and maintaining good relationships with lenders is the first step. Next, ensure that your banker knows your business and is confident in your strategy.
6. Manage your inventory carefully
Careful and optimized inventory management can benefit businesses in good and bad times. Here’s how:
- Excess inventory can tie up your free cash. If you have too much cash tied up in your inventory, it may be difficult to cover operating expenses.
- Too little inventory can mean lost sales and customers. If you can’t meet customer demands, they will go elsewhere.
Proper inventory management can help improve cash flow while meeting customers' demands.
When you have a lot of unknowns about the future, optimizing your inventory management is even more important. It can be especially challenging to move excess inventory during a recession. Depending on the state of the economy, you may be forced to sell your inventory at a discount or loss.
One way to optimize your inventory management is by using your forecasted sales and existing orders to make informed decisions. Your forecasts and existing sales can help you determine how much inventory you’ll need to meet customer demand. Using this approach, you can adapt your inventory levels to market changes and demand.
With all of the recent talk of recession, it’s important for businesses to prepare. Budgeting and forecasting are great places to start. Optimizing your expenses and focusing on cash flow can help ensure your business has enough money to stay afloat if business is slow.
When times get tough, having the tools to make informed decisions is even more crucial. And with a solution like Melio, you can amplify your cash flow by simplifying invoice payments, managing your expenses, and more.
Katie Thomas, CPA is the founder and owner of Leaders Online, a marketing company that helps accounting professionals increase their impact, influence, and income through thought leadership and digital marketing.