Times, as you know, are tough right now.
If you follow financial news at all — or even just prime-time news — you’ve probably heard financial experts and economists saying that we’re likely heading into a recession.
Their concerns aren’t unfounded. We’re facing the worst inflation in four decades and interest rates are increasing every passing day.
It’s frightening that a recession can potentially throw your business’ finances for a loop, and, unfortunately, recessions are a part of economic life.
While it’s hard to know for sure what will happen with the economy in the coming months, the good news is that you can control how you respond and prepare for a recession. By making wise choices now while the economy is still stable, you can prepare for the uncertain future.
This post discusses 5 ways to mitigate recession-related damages to your business’ finances.
1. Diversify Income
You’re probably familiar with the saying, “Don’t put all your eggs in one basket.”
This adage could be applied to your sources of income. Relying solely on a few products or customers for all your income generation has an inherent risk because if the economy tanks and sales dip, you’ll also lose your only income and ability to meet your business’s financial obligations.
Diversifying income by adding to your product list and expanding your customer base can really help. A business that operates in five countries has greater market diversity than one that operates in one country.
If one income stream starts to dwindle – or completely falls off– you’ll have other sources that will continue to generate revenue and keep your business afloat.
2. Keep Cash Reserves High
When preparing for a recession, conventional wisdom for personal finances also applies to businesses.
A key to navigating a recession relatively unscathed is bulking up your cash reserves.
If your cash reserves are empty, you will be tempted to take on more debt.
But with adequate cash in the bank, you’ll be able to continue paying for your expenses and buy time as you figure out the next steps with less stress.
So, start diverting some funds into a reserve savings account today while your profits are still steady. Don’t wait until a recession has already hit your business.
3. Keep Expenses Low
Spending more than what your business makes is never good.
When you keep your expenses low, your total monthly expenses are less than the revenue you bring in during that time. This approach will not only help save you money, but it will help make sure you’re not overextended should your finances be impacted by a recession.
Every business owner should be able to spot the “small” indulgences that are eating away at profits without spurring growth.
Start by asking yourself questions like, “Can I change suppliers without sacrificing quality?” “Are there services or perks I could cut on? The key is to cut your costs without losing value.
Doing this ahead of a recession ensures that your business is in the best shape to face future challenges.
4. Don’t Be Aggressive with Debt
The less debt you owe, the better off you’ll be in the event of an economic downturn.
Businesses often need to take on credit to finance their operations. While debt can be used as a tool for growth, it can also be the source of your business’ downfall if not managed properly.
When your revenue is reduced—or eliminated—you may experience difficulty paying your debts. You’re obligated to pay debt regardless of your profit and loss margins.
We all intuitively understand that there is good and not-so-good debt to carry. Generally, and particularly during a recession, the quickest way to tackle debt is to first minimize the most expensive debt, aka credit card debt.
Credit cards have notoriously high-interest rates that compound faster than other types of debt. Every month, you’re charged steep interest on whatever balance you carry. It’s not fun.
Limiting your debt will set your business up for efficient spending should you need to trim your budget and give you an easier time finding investors.
5. Keep Inventory Levels Low
A recession-proof business model utilizes low inventory levels.
Having too much inventory decreases your cash without adding to sales. By keeping your inventory low, your money won’t be tied up on your shelves should an economic downturn come knocking.
During a recession, liquidating assets can be a hassle. So, review your system to see if you’re ordering a lot of stuff and work on reducing your inventory requirements.
Recessions do not last forever—it’s one of their defining features.
Preparing for a recession now will help you stay afloat and navigate uncharted waters no matter what the future holds.
Your business matters to you, your customers, and the economy. Focus on these five ways to ready your business for uncertain financial times.