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Six Tips for “Recession-Proofing” Your Business

By: Nestor Caballero CPA

Six Tips for “Recession-Proofing” Your Business

 The title of this article is a bit of a misnomer. No business is immune from a recession or other economic downturn, but there are some strategies you can use to maximize the chances that you’ll weather future downturns. For example:

1. Manage cash flow while times are good. Often, during turbulent economic times, the companies that flounder are the ones that aren’t prepared to react quickly to economic warning signs. To increase your company’s agility, review your cash flow management practices now and make improvements if necessary. You should continually be projecting your cash flow several months out and have a plan for cutting costs or taking other steps to protect your business at the first sign of a downturn. One valuable exercise is to conduct simulations to predict the impact of various scenarios on your cash flow.

It’s also a good idea to review your payment terms with customers and suppliers to be sure they aren’t creating any cash-flow bottlenecks. Perhaps your suppliers would be willing to extend more generous credit terms. Or maybe it’s time to tighten up the sales terms you offer to customers. And take a look at your accounts receivable practices to ensure you’re billing customers promptly and being diligent about collecting.

2. Work with your suppliers. Developing strong relationships with your suppliers while times are good can do wonders for your business during the bad times. They can keep you abreast of developments in the market and help you secure the supplies you need in the event of a shortage. You might also talk to your suppliers about entering into contracts to help ensure a continuous flow of supplies regardless of economic circumstances.

3. Reduce your debt. One of the best insurance policies against a recession is to take control of your debt while times are good. Be aggressive about paying down lines of credit and other debts and try to secure lines of credit or negotiate increases to existing lines. That way, you’ll have access to the credit you need down the road if your cash needs change.

4. Just keep marketing. All too often, when times are lean, marketing is one of the first places companies look to cut costs. But despite the short-term benefits, drastic marketing cuts can do lasting damage over the long term. In a recession, marketing may be more important than ever, as you and your competitors fight over dwindling demand for your products or services. One thing you can do is to be more strategic about how you invest your marketing dollars. Prioritize activities that you believe offer the greatest potential returns, such as cross-selling to existing customers or target marketing.

 5. Strive for scalability. Although this won’t work for every business, consider ways to make your operations more scalable. For example, you might offer overtime to current employees or use independent contractors for certain activities rather than hiring new employees. Or you might outsource certain nonessential business functions or lease rather than buy facilities, equipment, or other assets. These strategies can help you develop the agility you need to react quickly to changing circumstances.

 6. Fine-tune your business. When times are good and your business is profitable, it’s easy to become complacent about adopting best practices that can improve your business. But sometimes strong performance is merely a symptom of a favorable market rather than a sign of a healthy business, and an economic downturn can quickly reveal the business’s weaknesses. To avoid this risk, benchmark your financial performance against your competitors and ensure that you have the infrastructure and management talent in place to thrive in any economic environment.