Nathan Liao, Author at Global Trade Magazine

As a company owner, you have likely been dealing with all the effects of inflation as of late the prices of raw materials have skyrocketed, shipping costs are way higher than usual, business commutes now weigh much heavier on your bottom line due to astronomical gas prices, and the list goes on. You have likely been hoping for a respite from it all, but unfortunately there may be another big problem on the horizon: a possible recession.

Periods of vast inflation are oftentimes followed by a recession, where consumers spend much less because they dealt with increased prices for too long. A drop in profits can really hurt any business, so how can you prepare for this possible scenario? In my experience as the CEO and founder of CMA Exam Academy (a Certified Management Accountant exam review program), I have discovered these must-know ways to prepare a business’s finances for a recession:

Remember That Cash Is King

When your usual customers choose to cut back on spending, this means you will likely see a lot less monthly sales than you’re used to. However, your business will still need to be able to afford all of its monthly overhead expenses, such as payroll, utilities, payments for software subscriptions, rent for an office (if you have one), etc. So it is absolutely essential to ensure your company has strong cash flow and cash reserves to sustain it during a recession. Funds will need to be readily available to keep your business running smoothly if sales drop.

This means that there is no better time than now to start directing a much greater portion of profits into your cash reserves. If you’re considering long-term capital investments, it would be in your best interest to evaluate the level of cash outlay you’ll need to commit and its impact on your day-to-day cash flow requirements.

Cut Overhead Costs NOW

As stated above, a positive cash flow and strong cash reserves will be pivotal to help keep your business running well during a recession. And if cash inflows drop in a recession, then it will be paramount to focus on decreasing cash outflows — this will keep much more cash in the company’s coffers in case of an emergency. One way you can do this is by cutting operating costs as much as you can now rather than later.

This will look different for every business, but start by looking at what is absolutely necessary to keep your company running smoothly. This could include a CRM platform, SEO tools, accounting software, and the assistance of all of your employees and/or contractors. Then decide which expenses you can lower or get rid of. Can you ship products with materials that cost less? Can you eliminate a cloud-based file drive you no longer need? Can you switch to less expensive raw materials without affecting your products’ quality?

Automate Processes with Software

One surefire way to cut operating costs is by implementing software applications that can automate processes, thus lowering expenses in the long run. For example, rather than paying for a pricey call center to answer customer service phone calls, you can implement an automated phone answering system that can answer every single incoming call, answer basic questions, and direct calls to appropriate personnel. Or, instead of paying an assistant to send invoices, you can automate the invoicing process with software like Procurify.

There are SO many software solutions that can be used to automate your processes, so start by doing a basic Google search on the process name + “automation”. You will likely see a lot of ads for a number of software apps, so do your research to see which one is the least expensive that has great reviews and can handle your business’s needs. You can chat with representatives to see if they offer any potential discounts. Also, it wouldn’t hurt to see if there are any online promo codes you can use for a software purchase.

Optimize Every Department As Much As Possible

A recession is truly the time to optimize operations, accounting, customer service, and all other departments. So find ways to streamline processes and cut costs across the board, but ensure that they won’t impact company growth, customer service, nor employee morale. This may mean switching up all projects so that every employee is in charge of tasks they would truly excel at. Or, you can implement a new weekly video meeting to help keep everyone in the loop about project deadlines and allow team members to ask each other questions and get immediate feedback. This would help eliminate time-wasting back-and-forth emails.

Last Resort: Revisit Bonuses and Salaries

If you foresee your business struggling during the recession, then you may have to revisit and put a temporary freeze on all bonuses and salary raises. However, it will be paramount to be absolutely transparent about the situation with all employees who are affected so that they understand the need for the freeze. This can help prevent frustration, a drop in employee morale, and costly turnover. Explain that the freeze on bonuses and raises is only until the economy gets out of the recession and the company is able to afford it again. Also, see what other benefits you can offer to employees in the meantime, such as half-days on Fridays.

To Wrap It All Up

A recession may be just around the corner, but you can ensure your business’s profitability stays strong with a bit of planning. Prepare your company’s finances by making sure you have positive cash flow and strong cash reserves available for an emergency. Also, cut overhead expenses now, automate processes with software, and optimize every department as much as you can. Finally, as a last resort, revisit and put a temporary freeze on all bonuses and salary raises just until the recession is over. Taking these precautionary steps should help your business’s finances and bottom line stay strong throughout a possible recession.

Author’s Bio

Nathan Liao is the founder of CMA Exam Academy, a top Certified Management Accountant exam review program. As a CMA and CMA coach, Nathan mentors accounting and finance professionals in over 80 countries to earn their CMA certification in as little as 8 months. The unique review framework in CMA Exam Academy has proven to be the key to his students’ outstanding success in attaining their dream of earning the Certified Management Accountant certification.

In order to thrive, businesses must have a healthy bottom line. Have you recently taken a long look at your product-based company’s financials and realized that its overall profit is much lower than you expected? Even though your business is making a ton of sales every month, the numbers don’t lie — profits may be much lower due to the money your company has to shell out each month for payroll, the costs incurred for manufacturing your products, and other overhead expenses. This can definitely be quite frustrating for any entrepreneur!

Now you may be thinking, how exactly can I increase profits without having to make massive changes in my enterprise’s operations? Is there a way to grow net profit without the need for more sales or marketing outreach? Well, wonder no more! In my experience as the CEO and founder of CMA Exam Academy (a Certified Management Accountant exam review program), I’ve discovered many simple-yet-effective ways a product-based business can increase its monthly profit. Here are three of them that I’ve encouraged other entrepreneurs to follow:

Prepare & Review Your Budget Now to Save Later

Your profit may be much lower than you thought it would be because you never set up a budget, or you set one up in the beginning of the year or quarter and then forgot about it. Don’t let this be the case any longer! Your monthly budget is your guidebook of exactly what your enterprise needs to function and deliver its offerings to customers. It is important to take the time to put together a spreadsheet that lists exactly which costs are needed for each month’s operations, including subscriptions for your CRM and sales management software, payroll, manufacturing essentials, etc. Include EVERY single cost, no matter how small it is! Better yet, use an accounting system to track all of it.

Once you prepare this budget, it’s time for the second step: comparing it to your business’s actuals. You may have written down the monthly overhead costs in your budget so they are set in stone, but your actual expenses could be much higher without you even knowing it! So take your last month’s financial statement and review the expense lines to identify the largest variances from your budget. For example, you may discover that the costs of office supplies or cloud-based file storage are higher than you budgeted for. Once you note these discrepancies, you can make changes to ensure the actual expenses match your budget.

Look for Waste in Production Processes

You may be completely unaware of waste that occurs throughout your production process. For example, a process that you use to manufacture your products may result in a lot of wasted materials, which can be really costly and lower your overall profit. So see how you can lower or eliminate the waste altogether. Assess all of your production processes to pinpoint any waste and consider changes that can be made to fix it. Even a small adjustment in the process could drastically reduce the waste, so this is a must-do step for every product-based company!

Waste can also refer to costly, unnecessary manpower in an inefficient process. For example, say you have several people working on one element of the production process, when in actuality only one person really needs to work on it. In this case, the extra manpower is a wasted cost — it can even be lowering the overall efficiency of the entire process!

Try to Negotiate with Vendors

Do you work with an array of vendors whose products are used to create your final offerings? For example, do you purchase bulk materials from several sellers to create your business’s products and then buy packaging supplies from another vendor? If so, see how you can negotiate with them to get the best prices for these items. Here are a few ways you can do this:

See if You Can Hammer Out Discounts for Early Payments

Every business owner wants their invoices paid on time so that they always have the funds available for operational expenses. Therefore, see if your vendors would be open to offering you a discount for paying your monthly invoice early. Even if it’s a small discount percentage, it can really add up to a ton of savings! For example, say you usually buy $4K worth of materials each month from one seller. If you can negotiate a 5% discount for paying your invoice early, you will save $200 a month! And if you secure 5%-off early payment discounts with every vendor you buy from, all of the savings would really add up and increase your monthly net profits!

If a seller isn’t open to an early payment discount, see if any of their competitors would be open to one. If one of the competitors is, mention this to your current vendor and it may persuade them to offer you one as well. They would likely much rather agree to a small early payment discount than lose your business altogether to one of their competitors.

Negotiate Pricing

Kind of going along with the last point, see if you can negotiate pricing with your vendors. Again, reach out to your vendors’ competitors to see what kinds of pricing options they offer and how they compare to those of your current vendors. If any of the competitors offer the same materials for better prices, see if your current vendors would be willing to offer the same prices. If they are not, then consider switching vendors — even if the pricing difference is just $50 a month, you will end up saving $600 a year! Always consider the long-term savings.

To Wrap It All Up

Are you looking for ways to increase your business’s net profit? You can do just that by preparing and reviewing your budget now to save in the next month(s). On top of this, assess your production processes to eliminate costly waste. Also see if you can negotiate with your vendors to secure discounts on early payments and lower the prices for your monthly purchases. Following these simple-yet-effective steps may help you save a lot of money and boost net profits, in turn improving your company’s overall bottom line.

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5 Ways to Prepare Your Company’s Finances for a Possible Recession

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