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Survival Tips for a Recession

In June 2022, the U.S. annual inflation rate reached a 40-year high of 9.1%. In the first quarter of 2022, the U.S. gross domestic product shrank by an annual rate of 1.6%; in the second quarter, it shrank by an annual rate of .9%. Plus, at the end of July, the Federal Reserve announced that it would again be raising interest rates by ¾ of a percentage point.

Many businesses are still recovering from the effects of the pandemic, and the Great Recession of 2008 is still fresh in most people’s minds, so many business owners are unprepared to face another economic downturn. What is a recession and how can you prepare your business for one? Learn more about recessions and check out these survival tips.

What is a recession?

A recession is a prolonged period of widespread and significant economic downturn that usually lasts at least six months, if not longer. For this reason, an economic recession is often recognized after a country’s gross domestic product declines for two consecutive quarters. If based on this definition, the U.S. economy would technically be in recession.

However, as NPR reported, this is “not an official definition.” Many factors determine whether a country is in a recession, and due to job growth and foreign business investment, “The White House has pushed back against calling the current economy a recession,” NPR also said.

Seven Survival Tips For A Recession

1. Manage your cash flow.

Cash is always king, whether times are good or bad. Cash flow, or the timing of when money flows into and out of your business, can make or break your company. When times are tough, however, cash flow issues can be especially difficult to overcome. With expenses higher than usual and revenue lower than usual, cash will be tight, and budgeting may begin to feel like a tightrope walk.

To get a handle on your company’s cash flow, look at your current cash flow statement daily, and start forecasting (if you aren’t already) with trailing three-, six- and 12-month cash flow forecast charts. These charts can help you anticipate times when cash is going to be tight, so you can implement strategies to prevent these challenges from occurring.

Additionally, create best- and worst-case scenario budgets that help you better prepare for unforeseen challenges or unexpected triumphs.

2. Evaluate your costs.

Costs are rising, and an economic downturn will only make rising costs more difficult. Do everything you can now to evaluate your operations and trim the fat in order to strengthen your cash position and enter the next recession with operating procedures that are already lean.

3. Protect your revenue.

Utilize unit economics to identify your most profitable revenue channels, and then safeguard these revenue channels and the profits they generate. This may entail changing your business model, optimizing pricing structures, and eliminating products, services, or clients that do not generate high-profit margins for your company.

4. Think twice about debt management and new financing.

Paying off debts may seem appealing during difficult times. However, doing so can quickly deplete your cash reserves, leaving you in a bind if you run into cash flow issues later on. When a recession hits, evaluate the interest rates on your debt and consider focusing on the highest interest rates first.

If your cash reserves are already depleted, you should look into potential financing options, especially if your business has seasonal cash flow issues. Having an established line of credit with your lender may relieve you of stress during difficult times.

However, before incurring new debt, carefully consider the additional costs and potential payment amounts to ensure that the debt will not simply bandage a larger, systemic financial issue in your company.

5. Build your cash reserves.

Consider your company’s cash reserves in addition to how you manage and take on debt. Savings are what will get you through difficult economic times. You can take steps to increase your company’s cash reserves. For example, instead of reinvesting profits in the business or paying out dividends to shareholders, you could save the extra money for a rainy day.

6. Stay on top of your receivables.

Everyone suffers financially during a recession. This means that your customers’ payments may become slower, and you may have a more difficult time collecting accounts receivable. Make an effort now to assess your clients’ payment habits. If you need to change your payment terms to get through a difficult financial period, schedule contract renegotiations as soon as possible to close your pay cycles and reduce your sales outstanding figures.

Stay on top of collections. Offer additional ways for your clients to pay (such as electronic payments). You can also consider stopping work with clients who don’t pay on time and no longer extending credit to clients if your cash flow can’t withstand it.

7. Make data-driven decisions.

When times are tough, it’s critical to make strategic decisions. When money is tight, even the smallest mistake can mean the difference between success and failure. Even if your instincts as a business owner are sound, you must consult your numbers, examine your company’s financial trends, and evaluate forecasts before making any changes.

Unfortunately, you have no control over the direction of the US economy. As a result, it’s critical to concentrate on what you can control: your business. Yes, a recession will present numerous challenges and hurdles for you and your business to overcome; however, embracing the challenges, knowing your numbers, and leaning into smart changes to lead your company with a fearless growth mindset can help you overcome and emerge as a strong business leader with an ironclad business strategy.

Having a plan is the best plan.  Our tax experts are here to help you ensure your business is set up for success.  Call or click today to set up a free consultation.

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