Guiding Your Business in an Economic Recession
Every economic recession creates opportunities for small businesses. Rather than simply hoping things get better, you can take action to improve your operations and position your business for growth. Taking steps now can prepare your business to survive the economic downturn and emerge even stronger. Here are several strategies to help.
Peak Business Valuation is happy to answer your questions about an economic recession. Reach out by scheduling a free consultation. We look forward to hearing from you!
Protect and Increase Cash Flow
The secret to surviving a down economy is cash flow. Cash is the lifeblood of the business. During an economic recession, many businesses find themselves struggling with cash flows. As a business owner monitor and maximize your cash flow by using a disciplined management system. This includes reducing or postponing cash outflows and increasing cash inflows.
Reducing Cash Outflows
- Negotiate with contractors and landlords for better prices or short-term reductions
- Negotiate longer payment terms with suppliers
- Cut wasteful discretionary spending
- Lease rather than buy
Increasing Cash Inflows
- Incentivize customers to prepay
- Offer discounts for early payment
- Send out invoices as soon as possible
- Make payment options easily accessible
Forecast your monthly inflows and outflows to ensure you have positive cash flow. Financial management is key to planning for periods of tight cash flow. By understanding where your cash flow is at, what your cash flow gap is, and the cause of your cash flow shortage, you can identify potential solutions.
The goal here is to make sure your company has positive cash flow and access to capital. A lack of liquidity can create immediate problems and hinder smart investments in the future of the business.
Strengthen the Company’s Financial Position and Build Reserves
During an economic recession, it becomes harder to borrow money and obtain small business loans. However, with good personal and business credit, you stand a better chance of being able to obtain needed capital. Lenders look for ways to boost their income but are careful about what they take on to minimize risk.
By strengthening relationships with lenders, your business is in a better position to negotiate additional capital. Companies who are in a good financial position during a downturn may be able to buy companies, equipment, or real estate at rock-bottom prices. Many successful companies use downturns to make acquisitions. This is another reason to keep credit lines open and have good relationships with lenders. Lenders love healthy companies that expand when other companies are not borrowing.
Rather than accumulating stock, which eats up working capital, track how much inventory will meet current demand. During slowdowns, sales often decrease leaving unused inventory which ties up cash flow. To reduce inventory, consider implementing a just-in-time inventory system. Or sell any inventory that is unlikely to move to free up cash.
Tracking slow-moving products will help you create leaner inventories and eliminate stock. Negotiating better prices for inventory can also help but beware to not sacrifice quality. Lastly, create systems to move inventory faster to reduce costs and transportation time. You can do this by increasing the frequency of deliveries and/or lowering the size of shipments from your suppliers. This allows you to keep fewer units on the shelf and more cash in your account.
Build Your Customer Base
If your business is going to prosper during tough times, you need to continue to build your customer base. This includes retaining current customers and gaining new customers from your competition. First, determine how the needs, preferences, and spending habits of your customers have changed, if at all. Next, research your competition to see what you can do to entice their customers into becoming your customers. This may mean offering something more or different than your competition.
Providing better customer service is one of the easiest ways to attract new customers and retain current customers. Adding a salesperson or two can help give extra attention and better customer service. Many businesses reduce their workforce to cut costs, but this can be counterproductive. It decreases the confidence of remaining employees while training new employees down the road can be more costly. Quality customer service can give customers a reason to spend their money in your business. It can be your saving grace during an economic downturn.
Explore New Markets
Exploring new markets is another area where investing may make sense during an economic recession. As competitors fold, it is a great time to increase market share. Assess your market to see where there are opportunities. Consider an acquisition or merger to gain access to new markets.
Launching new products or services may also make sense. However, be sure they align with your business’s core competencies. Asses your customer needs and tune in with what they want. You may not even have to come up with something new. It may just be providing extra value to a product or service you or a competitor already has.
Increase Efficiency and Eliminate Waste
One of the best ways to navigate a downturn is to increase efficiency and eliminate waste. Analyze your expenses to see where you can cut and control costs. Improving operational efficiency now will pay off down the road. The goal is to get processes leaner and deliver results more efficiently.
Acting early and fast is effective but must be well-planned. You don’t want to make cuts that in the long term will hurt more than they help. Overproduction, defective products, and poorly trained employees are a few sources of waste to initially consider.
There are also opportunities during an economic recession to increase efficiency. This includes taking advantage of lower prices from suppliers of equipment and technology. This can help streamline your production. Investing in outside help such as a consultant or financial analyst can be helpful in identifying areas where your business can be more efficient.
Don’t Slash Marketing
Many businesses reduce marketing and advertising expenditure during hard times. However, studies show that companies that increase ad spend during economic slowdowns end up outselling their competitors who cut back. In addition, the companies that cut marketing often find they spend far more down the road to recover from the loss of traction. Lean times are exactly when your business needs marketing the most.
During an economic recession, consumers spend differently. They typically look to get more value for their dollar. If you can position yourself as a company that delivers value, it will help you sustain sales volume. One tactic is to center your messages on the benefits or advantages of your product and/or service rather than making an emotional appeal. Emphasize quality and durability. In a poor economy, most consumers are looking for as much value as possible.
Take note that value is not the same as a low price. Many businesses attempt to cut prices to drive more demand, but this strategy often backfires. Someone else will always be willing to lose more money by cutting prices deeper. Instead, create marketing messages to highlight your value.
Focus and Invest in Employees
Lastly, and perhaps most importantly, employees need to feel valued and needed. Their work should challenge them, use their capabilities, and increase their knowledge. Encourage everyone to contribute to generating new ideas and problem-solving. After all, they know your clients best and may have the best insight into market needs.
Fostering productivity through incentives like bonuses or sales percentages can help motivate your team. Honest dialogue is also key. Employees will respect you and put forth more effort when they know where the company is and how their role can help the company stay afloat and continue moving forward. Employees are your small business’s most important asset.
One of the best ways to keep employees productive during slower times is to invest in training. Especially low-cost, group instruction, and skill broadening can be very effective. Meet with your team regularly to exchange ideas on boosting productivity. Create an incentive for good suggestions and foster a spirit of team unitedness.
Small businesses that implement the strategies above will be in a better position to weather the storm and are primed to seize emerging opportunities. Develop a strategic plan with specific goals to help keep your business on target as the economic condition changes. While there is no fool-proof method, these strategies can help your business survive an economic recession and perhaps profit from it.
Peak Business Valuation loves helping small business owners build their company. Questions are always welcome! Please reach out by scheduling a free consultation.
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