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How To Prepare For A Recession Part 1:  Finance


The Federal Reserve has committed to a policy of fiscal tightening by raising interest rates. According to Fed Chairman Powell “we still have some ways to go…we will stay the course [keep raising rates]until the job is done.” This leaves the economy on a knife edge. Raise rates too much, too fast and we fall into recession.  Too little and prices continue to rise and eat up savings.  

In this climate, one of many immediate challenges for business is competition for workers. A low jobless rate is feeding this and pushing up wages. These are about +5% versus last year which is too high for inflation to fall to an acceptable level. 

The inevitable question then, is whether the country needs to fall into recession in order to tame inflation. Given the threat, it’s wise as a small business to be prepared with plans to manage and survive a recession. With insight from Forbes, The Economist, KPMG, SHRM, and the US Chamber of Commerce, we’ve prepared some practical tips and advice we hope is of real, actionable value should the worst happen. In this first of three articles we look at financial preparation.

1. Manage Your Cash Flow
In all economic weathers, cash is king. Cash flow can and will make or break your company. In fact, over 80% of companies fail due to cash-flow mismanagement. When times are tough managing cash flow can be especially difficult. Higher than normal expenses and lower revenue means cash is tight and balancing your budget becomes a tightrope act. To get to grips with your agency’s cash flow:

  • Look at your cash flow statement daily, and start forecasting (if you aren’t already) with trailing three, six and twelve month cash flow forecast charts. These charts can help you anticipate times when cash is going to be tight, so you can implement strategies to prevent these challenges from occurring.
  • Additionally, create best and worst case scenario budgets that help you better prepare for unforeseen challenges or unexpected triumphs.
  • Follow up regularly on past due invoices from clients.
  • Double check your payables: This is easy to overlook when times are good and you are busy. Look at all of the payables you have outstanding and when they’re due. Double check all totals to ensure they’re accurate. And if necessary, stretch out payments to their due dates.

2. Get A Handle On Your Costs
With inflation still unacceptably high and continuing to drive costs up, an economic recession is only going to make escalating cost pressure more difficult. Do everything you can now to evaluate your operations and trim the fat so you can strengthen your cash position. This does not mean cutting programs and resources required for growth. It means cutting out overhead and operating expenses where viable and instead focusing your investment on marketing and advertising efforts to seek growth opportunities whenever possible.

3. Protect Your Revenue
Use unit economics to identify your strongest revenue channels, and then protect these revenue channels and the profits they generate. This might mean focusing even more on lines of business and even clients that generate the greatest profit and scaling back on others.

4. Be Smart About Debt Management And New Financing
In difficult times, paying off debt can seem tempting. However, this can deplete your cash reserves and leave you vulnerable if you experience cash flow problems down the line. When going into a recession, assess the interest rates you’re paying on your debt, and consider focusing on paying down the highest. 

If your cash reserves are already low, you might also consider looking into potential financing options, especially if your agency has seasonal cash flow issues. Having a line of credit already established with your lender might save you stress in difficult times and may well be easier when your business is stronger. Before taking on new debt, however, be sure you carefully assess the additional costs and potential payment amounts to ensure the debt won’t simply put a band-aid® on a more serious, systemic financial wound in your company. Your Credit Union can help with unbiased advice and typically lower-rate financing including low-rate Credit Cards (as low as half the rates of banks).

5. Strengthen Your Cash Reserves
In addition to considering how you manage and take on debt, focus on your company’s cash reserves. Savings can carry you through difficult economic times and you can take steps to strengthen your company’s cash reserves. For example, instead of reinvesting profits in the business you might choose to squirrel the excess away so you can rely on it on a rainier day. Try to keep the equivalent of three to six months of expenses in an emergency cash fund. Your Credit Union currently offers top national rates on a number of savings products to suit varied needs and investment timeframes.

6. Stay On Top Of Your Receivables
During a recession, everyone struggles financially. This means your customers might start paying more slowly, and you might have a more difficult time collecting accounts receivable. Make an effort now to evaluate your clients and their paying habits and stay on top of collections.

7. Make Data Driven Decisions
When times are tough, it’s crucial that you make strategically sound decisions. When cash is tight, the slightest misstep could mean the difference between success and failure. Even if your instincts as an agency owner are good, you need to consult your numbers, look at your company’s financial trends and evaluate forecasts before you make any changes in your business.

Surviving A Recession: Embrace The Challenge And Do Not Fear Change
There is nothing you can do to control the direction of the U.S. economy. So, it’s important to focus your attention on what you can control: your business. Yes, a recession will bring countless challenges and hurdles for you and your business to overcome, but embracing the challenges, knowing your numbers and leaning into smart changes with confidence can help you overcome and emerge a stronger business, and a stronger leader.

Note: The information provided here should not be considered investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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