The National Bureau of Economic Research (NBER) has declared that the recession officially started in February 2020. Every business is likely to be affected during this cratering economy. However, the changing economy also provides innovative businesses a chance to overtake their competitors who may not adapt to the changes except by firing employees. These resourceful businesses can use the recession for:
– maintaining cash flow, while other businesses have liquidity problems
– reducing business expenses to so they can reprioritize investment to functions with better returns
– making processes more efficient so that it is easier to grow fast when business conditions improve.
– increasing their market share, especially if their competitors do not adjust
Suggestions To Adopt in a Weak Economy
If a business wishes to thrive during a recession, it should have the foresight to think about the future – think in non-traditional ways, look at the organization differently and adopt business practices accordingly. Some suggestions which can help a business deal with a recession better are discussed below.
1. Closely Forecast and Monitor Cash Flow
The business owner should forecast the cash flow, considering the expenses, and accounts receivables from customers. He should also monitor the actual cash flow, to ensure that it is similar to the forecast. The financial statements should be prepared in time and have accurate, relevant information. Compared to balance sheets, income statements, statements with cash flow information provide a better overview of the financial status of the business. The business owner should be able to forecast cash flow for a three month period.
To get better prices, discounts for bulk purchases, or reduced prices in the short term, it is advisable to negotiate with business associates like landlords, contractors and suppliers. Discounts offered by suppliers for making payments promptly can help reduce expenses. If the supplier is not offering any discounts for bills, they should not be paid before the due date.
If the cash flow of the business is affected, it is advisable to contact creditors and ask them for an extension of the due date. This is better than waiting till collection memos are sent. However, the business should have a history of making timely payments, so that creditors feel confident that the future bills will be paid.
2. Improve Collections
When a business is flourishing, they may become lax while collecting money from customers, accounts receivable. However, this can adversely affect the business finances during the recession. Hence the business should try to reduce the collection period to below the industry average, though customers may resent this.
3. Increase Capital Reserves – Reduce Debt
Businesses should closely monitor the credit rating of all their customers, even the most highly rated clients. The business should communicate regularly with their customers to find out how they are dealing with the recession. Getting regular updates will help the business prepare for any financial problems. This will help build a long term relationship and in some cases lead to new opportunities.
While contacting customers regularly is always recommended, during a recession, this will prevent competitors from poaching customers. Sales staff should contact every customer regularly, and the business owner should also do the same.
Meeting clients personally is probably the best opportunity to resolve the problems of unhappy customers, and regain lost clients. It is advisable to finalize contracts for longer duration with the largest customers, offering them the best possible deal. The customers should be offered incentives for prepayment and discounts for long term purchases.
4. Monitor Inventory
Usually during a recession the sales will reduce and the inventory will increase resulting in a mismatch. This surplus of unsold goods can adversely affect cash flow. It is advisable to convert the unsold inventory into cash and also reduce the stock of the slow moving products. Inventories of products which are not in demand should be monitored closely and trimmed to the extent possible or even eliminated. This will ensure that cash is not blocked in unsalable stock. The recession is also a good time to remove products with a low profit margin from the inventory. However, the business should ensure that products in demand remain in stock.
5. Control Capital Expenditures
Businesses should postpone their plans for expansion and expensive equipment since they will take a many years to recover the investment. However the business should have enough capacity to fulfill their customer orders, when the economy improves.
A business can survive a recession only if the management takes difficult decisions and acts on them. Managing the finances properly is vital for business survival.