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

recession Countries dependent on commodities shipments of export cargo and import cargo in international trade may see slower growth.
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5 Ways to Prepare Your Company’s Finances for a Possible Recession

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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.

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A 4-Step Business Plan That Will Have You Looking Forward to the Next Recession

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The following is adapted from Rock the Recession: How Successful Leaders Prepare for, Thrive During, and Create Wealth After Downturns.

The highest-performing companies don’t fear recessions—they look forward to them.

The idea sounds counterintuitive, we know. What possible reason would a business leader have to want an economic downturn?

The answer is simple. A recession, properly planned for, can present opportunities for growth that would otherwise take a decade or more to pan out, like mass purchasing expensive assets for cheap, acquiring other companies, and convincing top-shelf talent to join your team.

By following the four steps outlined below, you can plan ahead and set your company up to not only survive the next recession, but use it to fuel your growth.

Create Uncontested Market Space

Rather than struggling to beat the competition and exploit existing demand during a recession, the more strategic route is to create uncontested market space (read the book Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne for more on this topic). Doing so, of course, is easier said than done and requires creativity and drive, but if you can successfully pivot to a new market, the payoff of a less-crowded space will be worth it.

Research shows that “companies that successfully adapt can emerge stronger than ever,” while those that do not “face a Darwinist reality” (Journal of Business Research). Why fight the competition when you can make them irrelevant?

The best way to create uncontested market space is to adopt new technology and use it to differentiate your service from your competitors’ before they get the chance to do the same. Find a way to solve a problem for your customers that no one else has solved. Embrace technology as a way to both create a better user experience on your clients’ end and to save labor on yours.

You’ll be able to integrate new tech into your company with fewer hiccups if you follow the next step and look ahead to your end goal.

Begin With the End in Mind

Look at your business goals from a strategic perspective by beginning with the end in mind. In other words, look ahead to what would happen in an exit situation.

Consider, for example, how an acquirer might pay seven to eight times earnings for an annuity service business, but they would only pay book value, or at most two to three times earnings, for a one-off project business. Use these predictions to plan how you want to diversify or grow your business to maximize its value.

Growing your company in a good economy will make you more likely to survive a recession because, in general, bigger companies tend to fare better. By looking ahead, you’ll know where to invest your money and efforts to reach the goals you have in mind.

This step naturally ties into the next, which involves bridging the gap between your beginning and end states.

Bridge the Gap

Once you have an end goal in mind, you need a plan to bridge the gap between where you are now and where you want to go.

For example, if you aim to go from $25 million to $100 million in revenue, and want to enter different markets, but don’t have the in-house talent to do it, then what you have is a “talent gap.” One way to close that gap could be through acquisitions.

Similarly, if you want to adopt continuous improvement practices within your company but don’t have anyone on your team who is an expert—that would also be a talent gap. Hire a “lean” expert.

Identify your gaps and come up with a timely, actionable plan to fill them.

Create Your “To-Buy” List

You have your market, your goal, and your plan. Now you just need to seize the opportunity created by a recession and acquire assets while the price is low.

As a general rule, everything is cheaper in a recession. Talent is cheaper. So is the competitor you want to acquire. And when banks are looking to dump assets that they’ve already written off—assets they just want to get off their books—that’s when you can score some of the best deals.

By planning out what you want to acquire—and maintaining enough liquidity to buy it—you can strike as soon as the recession hits, giving you first pick of assets while your competitors scramble to find the capital. 

Hopefully, being armed with this four-step plan will turn your recession fears into anticipation. Start creating market space, setting goals, laying out actions to make them happen, and writing your to-buy list, and you’ll be well positioned to experience enormous growth when the recession finally hits.

For more advice on recession planning, you can find Rock the Recession on Amazon.

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Jonathan Slain and Paul Belair founded Recession.com to give entrepreneurs a free tool to assess their recession readiness at Recession.com/Ready.

Jonathan Slain spent the Great Recession huddled in the fetal position on the floor of his office. He borrowed $250,000 from his mother-in-law to survive. Jonathan paid his mother-in-law back and is now a highly sought-after consultant (and, yes, he’s still married!). Jonathan leverages his experience in investment banking and as an entrepreneur on the keynote speaking circuit because he doesn’t want anyone else to have to borrow money from their mother-in-law in the next recession.

Paul Belair wasn’t scared when the Great Recession hit. He invested $1 million to purchase a business and just five years later sold it for over $70 million dollars. He achieved an American dream exit by using the Recession Gearbox model outlined in this book to create an intentional recession preparation plan. Paul is a CPA and an MBA, and currently serves as chair of the Young Presidents’ Organization Construction Industry Network.