A recession occurs when there is an economic decline for at least two consecutive quarters. Contributing factors to a recession include rising unemployment levels, declining retail sales, and a negative gross domestic product. Does this sound familiar?
Thousands of people have been experiencing layoffs and companies are increasing the cost of goods to combat supply chain disruptions and lower demand. The last marked recession occurred in 2008 with the housing market crash, leading to 1.8 million small business closures.
Many businesses panic during recessions, resulting in cutting resources in the wrong places and failing to meet consumer demands. Here are 8 financial strategies that you can use during a recession to keep your business afloat.
#1: Assess Where Your Business Stands
Before you begin laying off workers and cutting product orders, it’s important to understand how your business fits into the recession. Using data analytics will not only tell you the demand of your business, but also where you can reasonably reduce operating expenses.
Do you offer a commodity or a luxury good or service? Commodity goods are those that consumers will purchase, regardless of price, because they are essential. A luxury good is something consumers will purchase only when they have extra money. Commodity businesses won’t see as sharp of an impact of a recession compared to a luxury business.
#2: Prioritize Cash Flow
Effectively timing cash inflows and outflows are important regardless of the country’s economic state; however, it’s indispensable during a recession. You want to create positive cash flow, which means you are earning more money than you are spending.
Regularly review your cash flow to determine if you need to factor receivables, draw on a line of credit, or delay paying invoices if your checking balance is low.
#3: Support Current Customers
Extending your business and bringing on new revenue streams might lead to abandoning your primary customers. Taking on too much can drain your budget, increase stress, and heighten unnecessary risks.
Focus on your current customers and how you can increase their lifetime value rather than looking for new customers. If you can generate a loyal customer base, your business won’t experience as much volatility during the recession. Poll your current customer on what they want to see from your business to get a baseline of where you should focus your efforts.
#4: Become More Competitive
During a recession, businesses are going to be competing for your customers. You can’t afford to give away any customers to your competitors. As your competitors begin to face obstacles and threats, it presents a perfect opportunity to gain their customer base.
Prioritize brand differentiation and the value you are providing customers. Maybe you offer new customer discounts or strategically lower your prices while competitors are raising them. Finding a way to stand out in your industry increases your chance of successfully making it through the recession.
#5: Maximize Talent
The first area that businesses cut during a recession is their talent. However, this isn’t always the best choice. The top resource at your business is your talent. Having the right individuals tracking financial performance or curating your advertising campaigns can help you stay afloat.
Identify natural leaders and provide more incentives surrounding growth. Maybe this includes a bonus for meeting a certain sales threshold or an extra vacation day for meeting the monthly budget. Find what drives your team and implement performance goals instead of laying off your workforce.
#6: Take a Proactive Approach
Too often business owners wait until the recession is in full swing to make changes to their operations. Create long-term initiatives before you face financial hardships. This could be to increase profitability by a certain percentage or gain a specific number of new clients each month. Having defined goals will help you prioritize your resources and stay on track to reach your goals during hard times.
#7: Foster Innovation
Successful businesses don’t halt all forms of innovation during a recession. Instead, your business should focus on innovation by investing in the latest technology, such as AI, data analytics, and automation. Not only will fostering innovation help your business streamline processes, but you will also develop a competitive edge, attracting new customers.
#8: Make Informed Cuts
Making cuts is unavoidable during hard times; however, you should be strategic about where you are cutting costs. Does it make sense to order less inventory if your business is growing? Probably not. How about letting employees go when you are already struggling to operate efficiently?
You need to make informed cuts that won’t negatively impact your operations and profitability. This could be nixing a magazine subscription that no one uses or stopping a software license that hasn’t been utilized in a few months. Go through your income statement and identify key areas where you can reasonably cut costs.
Summary
Countless business owners scramble during times of recession, resulting in poor business decisions that have a lasting impact. To go over specific strategies that your business can benefit from implementing during recessionary times, reach out to one of our team members at BUSINESS today.
