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How to Prepare Your Business For Economic Downturn

·8 min read

Covid has had a devastating impact on the entire economy. Before this pandemic, economists were warning of a possible recession in 2021. Despite this, many business owners were still taken unaware and remain concerned with how to keep their doors open.

Unfortunately, it looks as if we will be struggling with these economic problems for the coming months. According to an IMF statement, the outlook for global growth in 2020 is negative, and it will be at least another year until we start to see recovery.

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

Here we'll explore some tips and advice to help make your business recession-proof so you can weather the coming storm.

Signs of a recession

The full implications of Covid have yet to be discovered, but there are some warning signs that we're headed for a serious recession. Here are a few examples:

  • A dramatic increase in unemployment: There are millions of workers currently furloughed, and it is anticipated that these may contribute to a dramatic increase in unemployment. A rapid rise in unemployment rates is a sure sign a recession is on the horizon.

  • Consumers losing confidence: When consumers are feeling good, they spend more, but as confidence in the economy drops, spending habits tighten. When consumer spending does slow, it is a normal indicator of the arrival of a recession.

  • Workers don't quit: As a business owner, you can develop a sixth sense for when you have an unhappy employee who is getting ready to quit. When the economy is good, workers are more likely to walk out and quit as they are confident they will be able to find other work. However, as confidence in the economy starts to fall, most workers will stick with their jobs as they fear they may not find something new. This trend is monitored with the U.S Labor Department's Job Openings and Labor Turnover Survey. This data is released every quarter, and September's figures for quarter two are anticipated to show a lower quit rate compared to last year.

  • New car sales drop: After a home, a car is likely to be your biggest purchase. While you may need a car to get around, you don't need a new car. During strong economic times, there are more new car sales, but as a recession approaches, sales of new cars drop.

  • Erratic interest rates: When interest rates behave erratically, it is a key indicator of an impending recession. Normally, you may notice a 10-year note pays higher interest than a three-month bill. However, as a recession approaches, there is an inverted yield curve, which occurs when long-term yields offer a lower interest rate.

  • Fewer opportunities for temps: As the economy dips into a recession, it is harder for temps to find work. The opportunities for temps tend to be more available when businesses are struggling to meet demand and need additional help. As the economy sours and demand shrinks, companies no longer need temp staff.

So what steps can you take so your business weathers this storm?

1. Create a quarterly cash flow forecast

One of the best ways to ensure your company can weather the ebbs and flows of the economy is to have an actionable plan. You need to have a complete understanding of where your cash is coming from and how it is spent.

Although in tough times it can be difficult to see beyond this week, a quarterly cash flow forecast is crucial to visualize the future.

This plan will allow you to account for all money and make adjustments as and where needed. You'll be able to use this information to act strategically rather than react when something happens. You can also review your plan each week to stay on track.

2. Plan for different scenarios

The future is never certain, but you can prepare for uncertainty with scenario planning. Try to consider different visions for the future of your company. This will help you to rethink possibilities and understand the outcomes that will keep you on the path to success.

Try to consider your original plan, a probable scenario and a worst-case scenario. When you work through each of these scenarios, you can consider solutions that you may not have thought of when you need to react to a stressful situation.

3. Investigate your options for liquidity

Liquidity is a crucial aspect of any business. Despite many companies still working from home, you need liquidity to be able to pay your employees, bills and expenses to keep the doors open.

There are lots of options to create liquidity from alternative finance solutions, using business assets to offering a partial stake to private equity investors. Also, there are currently government programs developed as a response to the pandemic that can also assist your liquidity.

Related: 7 Ways to Make Your Non-Essential Business Recession-Proof

4. Maintain communication with your bank

Last year, over 22,000 businesses filed for bankruptcy. That figure is likely to dramatically increase in 2020. However, in many of these cases, the businesses failed to maintain communication with their banks and lenders.

The most crucial step to help your business be recession-proof is to proactively communicate with your bank. Setting up a conversation with your bank will demonstrate the reliability of your business.

You can discuss your business risk rating, which loans have been downgraded, and other areas that could impact your business. This will help you to understand how your business will be treated moving forward.

5. Keep in contact with your vendors

In the current conditions, it is difficult to determine when everything will be back to "normal" so you must keep in contact with your vendors. This is the best way to ensure your cash flow has not been compromised.

For example, at the start of the pandemic, U.S. and European fashion brands canceled $1.5 billion of orders. This has a knock-on effect, as these companies may struggle to pay their own suppliers.

Check where the risks to your cash flow may be. You'll need to review your contracts, speak to your clients and make decisions from this point. With a complete understanding of the big picture, you can create a plan to ensure positive cash flow.

6. Maintain your relationships with clients

Your customers are your most significant income source. While losing customers is never good, it can be particularly hazardous during a recession. So, you need to make your customers your priority.

Focus on delivering exceptional customer service, which will offer a better chance of retaining your customers and attracting new business.  Adapt your products and services, offer incentives and evaluate your after-sales services to ensure your customers remain loyal.

7. Focus on what you do best

As you prepare to weather a recession, don't try to move away from your strengths. Although diversification can be a good thing, adding new products and services to try something will not be adequate protection against an economic downturn.

Experimentation can actually create vulnerability, taking attention away from what you actually do best. Instead, try to focus on what your business does best and work on doing it even better. This will create a stable foundation for any economic shifts.

8. Gain a lead on your competition

Not every company can ride out a recession, so you need to ensure your business is the one that can. It is important to gain a lead over your competition. You can start this by researching your industry. Look at what areas the competition outperforms you and where your business can improve. While this may be time-consuming, this research could save your company in the long term.

You can use this information to implement robust strategies, offer products or services the competition doesn't and go beyond client expectations. This will help your company to move ahead of the competition for your target market.

9. Don't neglect your marketing

Although it may be tempting to streamline your costs during a recession, don't neglect your marketing efforts. In fact, during an economic downturn, your marketing is even more crucial.

While other companies may scale down their marketing, you can leverage this opportunity to stand apart and increase your brand awareness.  From improving your copywriting to exploring new marketing strategies, you can increase audience engagement and boost sales.

Brainstorm ideas to maximize your marketing dollars and exploit your competitive advantage. This will help retain customer loyalty and keep your bookkeeping in the black.

10. Consider fresh ways to capitalize on delivery services

The pandemic has forced many businesses to reconsider their services. It's worth considering fresh ways you can capitalize on this. From digital assets such as teaching or coaching through to virtual offerings, think about the services that your business can provide.

Creative, unique ways to support your clients will help to keep your business on their minds.

While we've yet to discover the full financial implications of the pandemic, it is essential to start making your business recession-proof. Although there is nothing that will guarantee businesses can make it through a tough recession, strategic planning will offer a fighting chance to weather the potential storm.