Is it possible to prepare your business for a recession? Yes — Here’s how.

Opinions expressed by Entrepreneur collaborators are their own.

Current economic indicators show signs that a recession may be on the horizon. And while experts don’t expect this to be a prolonged recession, it will still come as quite a shock to many business owners who have been able to grow at a comfortable pace for the past 10 to 12 years. Fortunately, there are ways to prepare for what (possibly) lies ahead.

Business fundamentals remain true whether the larger economic conditions are favorable or in decline. However, there are some changes and adjustments that need to be made to withstand turbulent times like the one we are about to face. Here are six tips to help prepare your business for a lean winter:

Related: 9 Smart Ways to Recession-Proof Your Business (Fast)

1. Build a cash reserve

The first step is to build a cash reserve. Conventional wisdom says to set aside a minimum of six months for essential business expenses to help you weather stormy conditions for a while. However, if you have the ability to set aside more money than that, it is highly recommended. A year’s worth of money gives you a lot more wiggle room.

When calculating your cash reserves, consider how much cash you need to keep your business operating. Eliminate all the extras and focus on necessary expenses like debt payments, lease payments, utility bills, inventory, etc. If it costs you $20,000 to continue operating, multiply that number by six months and you’ll need $120,000 in cash. For a full year, you’ll need $240,000.

If you’re relying on things like factoring or outside financing, it’s also a good idea to reach out to those contacts to make sure the capital well doesn’t run dry. Heading into troubled waters is also a good time to start establishing new relationships for potential alternative funding sources.

2. Get serious about invoice and collections management

Outside of sales, nothing matters more during an economic downturn than the proper management and collection of invoices. As the economy slows down and a recession sets in, you will notice that customers start paying their invoices slowly to protect their own money. If the account used to pay in 30 days, it may now be more than 45 days. And those who paid for 45 days, it may take 60 days. The key is to stay on top of them. If you do nothing, your invoices will slip to the bottom of the pile. By sending invoices in a timely manner and following up regularly, you can get paid faster and keep your own cash flow moving.

3. Cut all non-essential expenses

Now is the time to cut any non-essential business expenses. Anything that isn’t absolutely integral to generating revenue or sustaining your business needs to go.

When eliminating non-essential expenses, make sure you are clear about what this actually means. It’s easy to assume that something like marketing is optional, but that’s a dangerous mistake. Marketing may not always show direct ROI, but it is one of the catalysts for your ability to stay relevant and compete for dollars in your industry. It’s okay to cut back on some aspects of marketing, but don’t ignore it completely.

4. Negotiate with suppliers

If you’re worried about cash flow, now is a good time to get ahead of the curve by renegotiating with your own suppliers. Remember, your suppliers are probably struggling too (or will start to struggle once the recession hits). They’d rather keep you as a customer than lose your contract. Use this leverage to potentially get better rates or payment terms. It is also possible to get a discount for paying in cash or paying in advance.

Related: How to Help Businesses Thrive During an Economic Recession

5. Downsizing and outsourcing

As hard as it is to make that call, downsizing your team may be the most beneficial and appropriate thing you can do. This is one of the fastest ways to throw thousands of dollars off the books every month. You can even replace these employees with outside help.

Outsourced contractors can cost you as little as 50 to 60% of the cost of a full-time employee. Not only that, but you can “hire” and “fire” them as much as you want. If business slows down, you’re not on the hook for a full-time salary. But if business picks up, you just make a few phone calls and outsource the work.

6. Listen to your customers

Avoid the temptation to make decisions in your corporate bubble. When a recession hits, your customers’ needs, wants, and pain points evolve. It’s important to understand these changing attitudes so you can adjust your own brand, products and services to reach them where they are.

First, make sure you ask customers for feedback. Second, you need to listen to the feedback they give. Third, act on it. This may require you to adjust your products and services, add new features, or restructure certain terms. Be flexible!

Related: You Can Beat the Next Recession: Here Are 5 Companies That Did Just That

The most successful companies find ways to thrive in any economy. Whether the larger economic conditions are positive or negative, they find ways to remain profitable. This should serve as an encouragement to you. Prepare the right way and you won’t just survive – you’ll thrive.

Leave a Comment

Your email address will not be published.