Speculation of a potential global recession has been making headlines in recent months, leaving many business leaders and individuals wondering how to best prepare their finances for an economic downturn.
A recession refers to a temporary period of decline in economic activity, for a few months or even years. Depending on your organization’s target market and product or service offerings, a recession can lead to a significant decline in revenue, so being prepared has high potential benefits.
Fluctuations in the economy are normal and natural, but this doesn’t make talk of a looming recession any less alarming. However, having an understanding of where your company’s finances currently stand and developing a proactive plan can help ensure your business isn’t caught off guard if the global economy does fall into a recession.
Top tips to prepare for a recession
- Make a financial plan
- Pay down debt
- Reassess financial priorities
- Boost business savings and reserves
- Identify additional income streams
- Network and build relationships
- Employ market intelligence
1. Make a financial plan
Any time a recession is looming, businesses need to rethink finances and projected revenue. When updating your financial plan for a possible recession, calculate different revenue forecasts—including one for a best-case scenario, one that is the most likely and realistic, and one representing what revenue might look like in the event of significant economic turbulence. Map out how you’ll manage your budget based on each scenario.
As you determine how to prepare your finances for a recession and build a financial plan to support business resilience, consider the following questions:
- What is the current monthly and annual budget for the business?
- How many months of expenses can be covered by current savings and reserves?
- What steps can the business take to increase savings?
- What is the ROI of existing products and services?
- What are the revenue projections for one, three, and five years?
- How much projected revenue might be at risk in a recession?
- How can marketing and sales strategies adapt to drive revenue in a recessionary environment?
- Which expenses can be reduced or cut?
- How can current product or service offerings adapt to meet changing customer needs?
- What new products or services can be developed to drive revenue during a recession?
2. Pay down debt
When a potential recession is on the horizon, paying down debt can be a balancing act, so understanding the risks and benefits is important. While having little or no debt can give your business more cash flow flexibility once a recession hits, taking steps to pay down debt sooner than expected can limit your immediate cash flow.
Sources of debt might include, but are not limited to:
- Lines of credit
- Capital expenses
- Business loans
- Equipment loans
- Excess inventory
- Personal debt
When identifying a strategy to pay down debt, a key step to take is assessing the interest rates for each debt source. Prioritize paying down any debt with the highest rates or variable rates that have the potential to increase in the future.
Additionally, if your business holds physical inventory, consider the costs associated with non-moving inventory. According to the U.S. Census Bureau, the total business inventory-to-sales ratio was 1.33 at the time of this writing. This means U.S. manufacturers and retailers hold approximately $1.33 of inventory for every $1 in sales, while the recommended range is $0.16 to $0.25.
Obsolete inventory can have a negative impact on business profitability, so identify ways to eliminate this inventory, such as selling at a discount, bundling products, or eliminating specific product items (SKUs). Reducing inventory can also help a business manage other supply chain-related costs by streamlining processing steps, decreasing storage and shipping expenses, and more.
While paying down business debt is key to weathering a recession, also take stock of any personal debt—such as car loans, mortgage payments, and credit card debt—and make an effort to pay down what you can.
3. Reassess financial priorities
With inflation at a 40-year high, business costs are increasing across the board; an economic recession will only make managing costs more challenging. Before a potential recession hits, take proactive steps to paint a full picture of your financial priorities and identify ways to reduce and optimize spending.
While the following isn’t meant to be an exhaustive list, some steps your business can consider to reduce operational costs include:
- Review software and other subscription costs. Your organization likely has a wide range of recurring subscription costs, including contracts with software vendors, app subscriptions, access to paid online news sources, dues for professional and networking groups, and more. Chances are, some of these subscriptions aren’t being utilized, while others might be duplicate, which can open the door for spending reductions. For example, if departments across the company use different paid project management apps, consider consolidating and using only one app. Using the same tools throughout the organization is also likely to improve cross-team collaboration.
- Renegotiate contracts. All businesses face challenges with a recession, meaning the vendors your organization works with might be more willing to offer better contract terms, rather than potentially lose your business. For example, some suppliers offer early payment discounts, while other vendors might offer more flexible rates or payment terms to retain your business.
- Rethink existing product and service offerings. If your business has products or services with lackluster sales, you can consider eliminating them to reduce marketing and production costs, and refocus your budget on high-performing offerings. Another option is bundling products, especially if you have physical inventory that you don’t want to go to waste. When potential customers see products discounted as part of a bundle, they might be more likely to buy, which can drive increased revenue.
- Embrace remote work. The costs of a physical office space, such as rent, utilities, and in-office food and events, can add up quickly. To reduce these costs, offer opportunities for remote work if your organization doesn’t do so already. This can reduce spending on an office space, as well as enable your team to reach an expanded talent pool of both full-time, in-house workers and independent professionals. Doing so will help ensure you’re not limiting your pool of prospective workers to those who live in close proximity to the office.
- Automate manual tasks. When it comes to automating tasks, some might jump to the conclusion that doing so means replacing individuals’ jobs with technology. But rather than taking away jobs, embracing technology and automating tasks can help your team work more efficiently and strategically. For example, if initial candidate screening is automated, your recruiting team can spend more time interviewing qualified candidates. And by automating invoicing, your finance and accounting teams can focus more on larger strategic tasks to prepare for a recession.
Determining which expenses to keep, renegotiate, and eliminate leading into a recession can get complicated. Consider enlisting the help of an independent finance expert. An independent professional can bring an outside, objective perspective, along with expertise from working with other organizations, to help get your organization’s finances in order ahead of a recession.
4. Boost business savings and reserves
Building healthy business savings and reserves is always a best practice, one that should ideally happen before a recession. On both the business and personal side, a common recommendation is to set aside at least six months of basic, recurring expenses, often referred to as an emergency fund, to tap into during challenging financial times. If you have the resources, building even more of a cushion is recommended.
Recurring business expenses to take into consideration as you save can include, but are not limited to:
- Debt payments
- Lease payments
- Utility bills
When boosting your savings and reserves, calculate your total monthly expenses and make sure you have enough to cover these expenses for several months, with some wiggle room in case costs increase. Additional savings are especially important now, given increasing inflation rates.
5. Identify additional income streams
Relying exclusively on revenue streams that have driven strong business outcomes in a healthy economy can be risky during a recession. If the industries you sell into contract during a recession or the products and services you offer aren’t as relevant when your target market is cutting costs, this can lead to a quick decline in revenue.
To continue driving revenue in order to come out ahead in a recession, consider identifying additional income streams for your business. Options can include:
6. Network and build relationships
Forging relationships with new contacts can be tricky once a recession hits, as many organizations are hesitant to try new products or services when budgets are tight. Taking proactive steps to network ahead of a recession can help your business develop relationships that you can continue to nurture.
Consider attending online and in-person networking events to expand your list of contacts and prospective customers. Such events can also give you the opportunity to learn more about the current pain points your target market faces, as well as emerging industry trends. This can help you adapt your messaging or offerings to meet evolving needs.
In addition to attending events to expand your network, continue to strengthen your relationships with current customers and other contacts. All organizations have to make difficult decisions related to reducing expenses during a recession. But if your organization builds strong relationships with customer contacts and provides true value to their business, they will be more likely to remain loyal and continue investing in your product and service offerings. Another benefit of maintaining positive relationships is that your contacts may also send referrals your way, which can help your business continue to drive revenue in the event of a recession.
7. Employ market intelligence
While recessions are daunting, economic downturns can also present significant opportunities to innovate. In fact, several billion-dollar companies were founded during the Great Recession, including Airbnb, Slack, Uber, and WhatsApp.
Similar to attending networking events to learn about emerging trends and customer needs, tapping into market intelligence can also help identify market trends and potential business opportunities.
Embracing marketing intelligence can help your business:
- Identify market shifts
- Understand evolving customer needs and demands
- Identify growth opportunities
- Optimize marketing spend
- Drive operational efficiency
- Analyze competitor strategies and gain an advantage
A wide range of platforms and tools are available to help your sales and marketing teams with market intelligence efforts. Some examples include AlphaSense, Demandbase, G2 Crowd, Semrush, and ZoomInfo.
Consult with a finance expert
Developing a financial plan to support business resilience during a recession can be complicated and overwhelming. The process can lead to difficult conversations about which business expenses to cut, keep, and reallocate. But having a proactive plan at the ready can enable your business to quickly pivot in the event that a recession strikes.
Rather than managing the process on your own, consider tapping into the expertise of an independent financial professional. Finance experts are available on Upwork to assess your current business finances, provide expert recommendations based on their prior work experience, and implement a plan to help your company weather a recession.
Skilled finance professionals are available on Project Catalog™, offering one-on-one consultations and fixed-priced projects. Schedule a consultation or select a project that meets your business needs and kick off the engagement right away. Browse available finance experts now.
Upwork is not affiliated with and does not sponsor or endorse any of the tools or services discussed in this article. These tools and services are provided only as potential options, and each reader and company should take the time needed to adequately analyze and determine the tools or services that would best fit their specific needs and situation.
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