In order for your company to survive a recession is to be prepared ahead of time. However, there are very few companies that ever prepare for a recession while things are going well which is a big mistake. Most people prepare when it is too late. This delay limits their choices. It forces companies to make rash decisions in response to worsening conditions. Those decision can have a long-lasting negative consequence.
Toda we will cover 10 things that you can do to prepare your business for a recession. These actions will help your business no matter what the economy looks like and will protect your company if a recession occurs.
Most importantly, you will be better prepared to take advantage of any opportunities that emerge during, or after, the recession. This will put you ahead of competitors and you will have a much better advantage than them.
Manage Invoicing and Collections Properly
When companies anticipate a recession, they start by paying their vendors slowly. Invoices that were paid in 30 days now get paid in 40 or 50 days.
Companies pay invoices slowly to protect their most precious resource which is cash. Slow payments affect you negatively and the cash is owed to your company, and it is money that you need to pay your own expenses.
Slow payments will sneak up on your company unless you have a solid program to collect slow-paying receivables. Collecting invoices is one of the most important functions of any business. It brings cash in. It also allows you to take the pulse of your client’s payment habits. In turn, this insight gives you an idea of your client’s financial health.
Offer Payment Terms Carefully
Companies that sell to other businesses have to offer payment terms to clients. They offer terms because clients demand 30-to-60 days terms to pay invoices.
As a vendor you have to offer terms if you want your client’s business. It is an unfortunate cost of doing business that can hurt small companies. The problem is that you need to determine if a client is creditworthy. Some business owners use client size and reputation as a way to determine if clients will be able to pay back.
The best way to determine how creditworthy a client is by running a credit report. The report will be able to tell you how reliable your potential client is paying other vendors. Payments to other vendors are a good proxy for how well they will pay you.
You should offer credit terms only to clients who have a good track records of paying vendors. Those who do not have a good track record should pay in advance or during delivery.
Every company has problem clients, and they can be even more problematic at the first sign of recession. Ask yourself if these clients are worth it and if they are producing net gain for your company. You should consider transitioning them out if they are not producing net gain.
Get Credit from Suppliers
You want to get 30-to-60-day terms from vendors just like you would with your clients. This will help your cash flow. You want to get credit from suppliers during “good economic times”. If you remain a good payer, you will keep these terms with your vendor if anything happens which will result in helping your cash flow.
Build a Cash Reserve
Every business should have a cash reserve that can be tapped during difficult times. Cash reserves buy you time and options. They are an important part of preparing for and surviving a recession.
It is simple to build a cash reserve, but it is not easy. You need to divert funds from your revenues into a reverse savings account. The cash reserve should be able to cover your expenses for some time. It is up to you what you want the size of your cash reserve to be. Some want a small one, others prefer a larger reserve.
The drawback to having a cash reserve is the money is sitting in the bank rather than being invested in the business.
Having financing during a recession can help your business survive and grow but getting financing during a recession can be hard. It is easier to get financing when things are okay. Consider a business line of credit or invoice factoring.
It can be difficult to manage inventory for a company. Having too much reduces your cash without adding to sales and having too little can result in loss of sales and customers. Manage inventory against existing orders and forecasted sales. Optimize the amount of inventory so that you have enough, plus a safety allowance.