It seems like inflation is affecting the cost of just about everything in our daily lives, from vegetables to petrol. If wages don’t increase to match inflation, we could have a recession on our hands. It’s a daunting thought. And why it’s critical that we all take steps to future-proof our businesses and plan ahead now.
How a recession can impact business
Recap: A recession is a significant decline in economic activity that lasts for at least six months. It’s typically characterised by a decrease in gross domestic product, higher unemployment, and lower consumer spending.
A recession can be caused by a variety of factors, including a drop in consumer confidence, an increase in interest rates, or a decrease in exports. A well-managed economy will typically recover from a recession within two to three years. However, if the underlying causes are not addressed, a recession can turn into a prolonged period of economic stagnation or even lead to a depression.
So let’s look at some ways a recession impact a small business.
Reduced cash flow
In a recession, consumers typically spend less money. This reduced spending leads to less revenue for businesses, which in turn leads to less cash flow. Less cash coming in could make it difficult to meet financial obligations. The Xero Small Business Insights report for July 2022 examines the cash flow crunch that small businesses are experiencing now.
If consumer confidence and spending decline, there could be reduced demand for goods and services. As a result, businesses may cut back on production or have fewer new projects, which could mean layoffs and even further declines in consumer spending. The cycle can continue for some time, exacerbating the recession’s effects.
During a recession, most businesses have to make operational changes and strategic pivots in order to stay afloat. While it might seem counterintuitive, many choose to invest in technology and automation at this time. Spending on software like Xero and WorkflowMax can help reduce the time it takes to do repetitive job management tasks that can be easily done through automation.
8 recession planning strategies to use in an economic downturn
Planning can be a tough process at the best of times, let alone when you’re trying to survive an economic downturn. But planning for the worst-case scenario is one of the best things you and your clients can do.
Here are strategies you can adopt in your own business and advise your clients about.
1. Build a cash reserve
A cash reserve can help you weather a temporary dip in sales, unexpected expenses, or a recession. It also gives you and your team peace of mind, knowing that the company has a financial safety net in place.
Tip: When building up an emergency cash reserve, aim for at least 6-12 months of surplus funds. It’ll take time and discipline but it’s well worth the effort.
2. Protect cash flow
By taking steps to improve cash flow management, you can reduce the risks of financial problems and ensure resources are in place to get through tough economic times.
Tip: One way to forecast cash flow and business performance is by using Xero Analytics. If you haven’t had a good look at it yet and shared its insights with clients, you’ll find that it’s a valuable tool.
3. Establish creditworthiness and pay down any debts
Recessionary periods are often accompanied by a decrease in credit availability. When lenders are reluctant to extend credit, businesses with strong creditworthiness are more likely to obtain the financing they need to pay down any debts and continue operations.
Tip: In the same vein, it’s important that you chase down any debtors that owe your company money in order to help with cash flow. Xero and WorkflowMax can help your business get paid faster and on time. And WorkflowMax’s work in progress manager lets you see your un-invoiced work in one place and generate invoices as you go so you don’t miss out on any billable time.
4. Review budgets, operating costs and expenditures and cut back where you can
One place to start is by looking at expenditures. Are there any areas where you’re spending more than you should? For example, are you spending too much on office supplies or rent if you’re mostly working from home? Cutting back can help to save money without impacting the quality of your product or service.
Another area to examine is operating costs. Can you renegotiate your lease or switch to a cheaper supplier? Can you manage your jobs and projects more efficiently?
You might be forced to make tough decisions, but the goal is to make sure your business survives the recession so that you can thrive when the economy recovers.
5. Review marketing strategies (but don’t stop marketing!)
One area that’s often reviewed during tough economic times is marketing. Many businesses slash their marketing budgets in an effort to save money, but this can be a false economy.
During a recession, consumers are more price-conscious than ever before and can be more loyal to brands they trust. So you want to continue to tell them about your special offers and why their business is so important to you. It’s also a good idea to spend some money on research to identify new opportunities and markets.
Tip: Reviewing your marketing strategy on a regular basis, even in good economic times, can help you to stay ahead of the competition and make the most of your marketing budget. Read why HBR says you shouldn’t cut your marketing budget in a recession.
6. Make customers a priority
Loyal customers are the lifeblood of any business. They’re the ones who keep coming back. Who spread the word about your business to their friends and family. And who help you stay in business.
That’s why you have to make sure to treat your customers right. Give them the best possible service, offer fair prices, and show them that you appreciate their business. Do that, and you’ll have customers for life.
Tip: WorkflowMax has lead manager and client manager features to help convert more leads and keep customer relationships strong.
7. Manage your staff and upskill employees where possible
During tough economic times, it can be tempting to cut back on employee training and development. After all, there’s less money to go around. But investing in employee management and upskilling can help you not only survive, but thrive.
Tip: When employees feel supported and empowered, they’re more likely to be engaged and productive. Upskilling employees in all different types of roles can help spread the load and help out departments that might be feeling the pinch more than others.
8. Develop innovative practices
By investing in technology and automating processes, you can become more efficient, save money and have more time to spend on developing new products or services.
Tip: Using a tool like WorkflowMax can help you keep track of your unbillable time and develop a strategy to close that gap. It also lets you see profitability across your jobs and manage your staff for maximum efficiency.
Combine a systematic approach to business planning with the insight that technology offers, and you – and your clients – can be better prepared for what lies ahead.
Thanks to our subject matter experts for sharing their insights for this article:
James and Shaun are Senior Advisors at BlueRock, a multi-divisional professional services firm providing support to entrepreneurs and business owners. They’re experts at helping businesses manage their cash flow and operations every day.