The global economy has endured a difficult year, with inflation reaching decades-high levels that have hampered post-lockdown spending and forced central banks to take drastic measures to bring it back under control. Although their efforts may have been successful, there is a potential cost to pay in 2023, as a recession for the world economy may be on the horizon. Despite this, not everyone agrees that a global recession is inevitable. Whether or not it will come to fruition may be determined by three major factors: the actions of central banks, the effects of China’s reopening, and energy prices. For businesses, the potential for a recession to have an impact is always a concern. To best prepare, it’s wise to develop a “recession preparation plan” before it’s needed. To get started, here are some strategies to consider:
Build a cash reserve.
It is suggested to reserve between 6-12 months of operating expenses in cash; however, this amount can vary depending on who you ask. Nonetheless, money in a bank that is not being utilized by the company is essentially wasted. To ensure you are making the best decision for your company, careful consideration should be taken. You will have to find the right balance to make sure you are getting the most out of your money.
Safeguard your cash flow.
No matter what the economic situation is, don’t worry about the cash leaving your business; instead, focus on securing and protecting the cash that is coming in. Communicating frequently and clearly with those companies who owe you money is important. Establish consistent billing patterns and practices with these companies. Show them how important they are to your business and become indispensable. Offer incentives such as early payment discounts, provide good collections practices, and reduce Days Sales Outstanding to maximize your cash conversion cycle. Even one customer defaulting on an invoice can be detrimental during a recession, so take the necessary precautions to protect your business.
Establish your creditworthiness.
Be sure to pay your creditors on time – even early if you can – and try to pay off your debt as much as possible. This will help your business maintain an excellent behavior score, which banks typically assess when deciding on credit lines. Once you have a good score, it’s the perfect time to ask creditors for better terms, discounts, and bigger lines of credit. It’s best to renegotiate credit terms before any economic downturns, so you are prepared when the time comes.
Examine and evaluate operating costs.
To prepare your business for a recession, examining expenses and looking for ways to reduce them in a smart way should be the first step. Consider looking at any areas where business expenses can be cut, and do so as soon as possible. Doing this will save money and help you be better prepared if the recession lasts. Acquiring trade credit insurance is a cost-effective way to protect your business from the recession’s effects. Additionally, look into how you can vary your expenses or reduce them altogether. Lastly, if any employees need to be laid off, it is best to do so before the recession starts in order to avoid damaging company morale or not having enough staff to properly provide for customers. Lastly, conduct layoffs with extensive forethought, taking into consideration the effects such a decision might have on company morale and the ability to provide for customers.
If you have inventory, manage it carefully.
You should strive to keep just the right amount of inventory to serve your customers. To ensure inventory turnover, it’s important to talk to suppliers and create a plan. Showing how committed and prepared you are to succeed by discussing credit terms and making plans about inventory will demonstrate your dedication to them. If they are not willing to work with you, seek help from an insurance company to provide you with compensation and guidance to maintain your business. With their help, you can benefit from their expertise in trade credit, collections, receivables management, international collections, and more. They can help you increase your inventory turnover ratio and protect your cash flow by predicting and mitigating risks without any disruption in inventory.
Secure financing before you need it.
It is essential to create a strong connection with your lender(s), both current and potential, in order to support your working capital. This bond of trust allows your company to adjust to any economic shifts or take advantage of any desirable prospects. To ensure you have a successful relationship with your banker, it is important that they are well aware of how your company runs and that they believe in your plan. The most effective time to look for capital is when you don’t need it.
Never stop marketing.
One way to conserve expenses while continuing to promote your business and services is to invest in international markets, particularly those not affected by the recession. By continuing to advertise, you show existing customers that they are in good hands and demonstrate to potential new customers that your company is a leader in the industry. Advertising your business during difficult times will ultimately lead to a return on investment and increased cash flow for your company.