How to get your business ready for a recession

How to survive a recession in businessIf you want your business to be able to face a future recession with confidence and have the highest possible chance of survival, you need to be prepared ahead of time. A common mistake is failing to prepare while things are going well, you need to avoid falling into that trap.

Most business owners start to make changes after being hit with the damage if a recession, but this is not the way to go. Delaying your decision making will always eventually bring about consequences.

This is because it will lead you to making eventual rash decisions out of panic and a lack of time. If you are making big calls of action for your business as the situation is worsening, you will be impacting it in a negative way, which could even lead to its closure in some cases.

How to survive a recession in business

There are a number of things your business can implement to ensure your company is fully prepared for a recession. These actions will help your business venture, despite how the economy is holding up at any particular moment, and more importantly than that, is that they will help protect your company during a recession.

These changes will place you in a better position to take advantage of any potential opportunities during, before, or after a recession. If you want to be one step ahead of your closest competitors, listen to our advice and act on it.

Signs of a recession

The full implications from the Covid pandemic for the long term health of the economy is still yet to be discovered, but there are some warning signs that we’re headed for a serious recession.

Here are a few examples:

  • A increase in unemployment: The millions of workers that where furloughed, this is anticipated that these may contribute to a dramatic increase in unemployment. Any rise in the unemployment numbers is a sign a recession is looming.
  • Consumers confidence: When consumers have confidence they feel good as a result of this they tend to spend more, but once confidence in the economy drops, spending habits tighten. Once consumer spending slows downs, it is a fare indicator of the arrival of a recession.
  • Workers don’t quit: Business owners have a sixth sense for when you have an unhappy employee who is getting ready to quit. When the economy is firing on full throttle, workers are more likely to walk out and quit as they are confident they will be able to find other work. As confidence in the economy starts to fall, most workers will stick with their jobs as they fear they may not find something new.
  • New car sales drop: New car sales are a good sign of a booming economy, 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. When 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, temps will find it harder to source work. The opportunities for temps tend to be available when businesses are struggling to meet demand as well as needing additional help. As the economy downturns, the demand shrinks, companies no longer have a need for temp staff.

Manage invoicing and collections effectively

Once businesses begin to anticipate a recession, they tend to start paying vendors slowly. Invoices that once got paid within 30 days now take closer to 40 or 50. Invoices that were paid in 45 days now take 60, etc.

The reason for this slowed down payment is to protect a company’s most precious asset: cash. However, you should avoid letting clients and/or customers slow down payments at all costs, as doing so can have a negative effect on you. This cash is owed to you and should therefore arrive on time, as previously agreed in a contract; you need this money to pay for things and cover expenses.

Slow payments will sneak up on your organisation except if you have a strong program to gather slow-paying receivables. Collecting invoices is one of the main elements of any business. It acquires cash.

It likewise permits you to take the pulse of your client’s payment habits. Thus, this understanding provides you with an idea of your client’s financial wellbeing.

Invoice collections should only be second to sales and service in your mind (as a business owner). A decent collections program will contain and/or offer the following:

  • 30–60-day terms to good clients
  • Uses a well and professionally written contract
  • Sends out a delivery acceptance letter
  • Stays up to date with clients and follows them up
  • Always handles disputes in the right manner

Offer payment terms with caution 

Businesses that sell to other firms generally have to offer payment terms to clients. They offer terms since clients request 30-to 60-day terms to pay invoices.

As a seller, you don’t get a very remarkable say in regard to this interest. You offer terms on the off chance that you need your client’s business. It is a sad case of carrying on with work that can hurt small companies.

This leaves your business with an issue. How would you decide whether a client is financially sound? Some entrepreneurs use client size and reputation as a method for deciding whether clients will be safe payers.

Evaluating client size and reputation can sometimes work. Be that as it may, a few big organisations with “great reputations” are actually bad credit risks. What’s more there are likewise little, lesser-known firms that have great credit.

How might you differentiate? Recession preparation

The most solid method for deciding the financial health of a client is to run a credit report. The report can let you know how dependably your potential client is paying other vendors. Payments to different merchants are a decent intermediary for how well they will pay you.

You can check business credit report at Ansonia, Dun and Bradstreet, Redflag Alert and Experian.

Clearly, you should offer credit terms only to clients who have a decent history of paying vendors. Potential clients who don’t have a positive history should pay ahead of time or at conveyance.

Get credit from suppliers

Similarly, as you need to give 30 to 60 days to clients, you need to get comparative terms from your vendors. This methodology aids your cash flow in more ways than one.

You should try to get credit from providers during “good economic times.” As long as you remain a good payer, you will probably keep these terms with your vendors if there is ever a slump. These terms will clearly assist your cashflow and help your venture to stay financially sound.

Build a cash reserve

It is great business practice to keep cash reserves of around three to six months of operating costs and expenses, so the business has sufficient means to get past any unexpected difficulties or sudden troubles. Nonetheless, with a more long-term issue that implies a reduced income over a sustained period, or on the other hand in case costs likewise ascend during this time span, it can without much of a stretch be the situation that savings essentially aren’t enough for the business to continue as normal.

Government research demonstrates that as of March 2021, only 37% of organisations of any size had over six month’s cash reserves. In any event, when a business has conquered one issue, developing those money stores to a suitable level again can set aside time and leave businesses defenceless assuming another issue hits before they figure out how to do as such.

Use your savings for sales and marketing

Next, you should consider applying the savings from the tips we have mentioned in this guide towards improving your sales.

Businesses normally stop investments in sales and marketing during downturns. You may not be surprised to learn that this cutting leads to lower revenues, often creating a vicious cycle. You will find experts regularly telling business owners to place more funding into sales and marketing during downturns, as it can help them get out of a rut.

Streamline operations

If you streamline operations as quickly as possible, you’ll be able to face a recession head on and likely come out the other side of it safe and sound. Most business ventures will begin their streamlining as the recession takes effect, which is useful but not the best method.

Once again, this is an example of being prepared for the tricker moments, instead of trying to deal with them as they sneak up on you. The best time to start streamlining operations is always right now. Take a careful look at your expenses and cut out anything that isn’t absolutely necessary to the success of your business venture.

You can also consider outsourcing certain functions of your company, but only if it proves to be cost effective.

Move on your problem clients

All businesses have problem clients. These people are always asking for more, complaining non-stop, paying you late for your services, or even underpaying. As the early signs of a recession start to show, these clients will probably turn even more problematic than before.

Are these clients really worth it? That is the question you need to be asking yourself. If they aren’t helping to turn over a serious profit for your company, then why should you have to put up with them? If they don’t affect your net gain in a good way, it is likely time to transition them.

Unprofitable clients should be let go off as they are doing nothing for your business venture. Clients that tend to pay late consistently, or underpay, should be transitioned to ‘pay in advance’. However, before you make any big changes you will need to check your contract with the clients and fulfil all clauses before you can exit the contract safely.

Apply for financial support?

There are a number of different types of financial support offered to businesses during a recession. Invoice Factoring is one, it works by immediately funding unpaid invoices, instead of waiting 30 to 60 days to get paid. The payment enables you to use your funds to run your company. The financing transaction settles when your client pays the invoice in full. Your client still pays on their usual schedule.

There are two installation payments. The first will provide up-to 90% of the invoice. It is deposited in your account as soon as your client gets invoiced. Note that the invoice must be for completed services or a delivered product.

Once your client pays the invoice in full, the factor deposits the second payment in your account. This instalment covers the remaining 10% that was not advanced initially, less the fee.

Fund Your Business

Speed up your cash-flow today. Forget issues caused by slow-paying customers