Yes, we said it – the “R” word: Recession. By definition, a recession is a temporary economic decline for at least two successive quarters and as of earlier this week, we officially entered our second quarter of decline. The question is, without knowing how long a recession will last, how can we manage to keep our businesses afloat?
Last month we discussed the importance of a mid-year review and if you have been staying on top of your financials, you probably have a good idea of where your business stands in preparation for a recession. If you have not been able to stay on top of your financials, we get it – you are busy running your business, but now more than ever, it is essential that you take the time to review your numbers.
When you are facing an uncertain economic situation, you will want to build your cash reserves to help you weather the storm. Even if you have been reviewing your financials regularly, you may want to look a bit deeper and see where expenses can be reduced.
Let’s look at several areas that can impact your cash reserves:
Capital spending – are there big-ticket items that can be postponed? Can you potentially repair equipment rather than replace? Do you have excess equipment or assets that you can sell or lease out?
Inventory – Review your inventory to see if your current stock levels make sense. Too much inventory on-hand can waste space and money while too little inventory can result in lost sales or rush shipping to get materials in stock.
Day-to-day expenses – Do not overlook the little things that can add up, such as office supplies and utilities. Little expenses can add up quickly.
Sales – Sales are key to driving revenue and making money requires spending money. However, there may be some areas that can be trimmed. Can you save money on fuel by having more remote meetings? Can you cut back on meal expenses or client gifts? Can you develop online sales materials in place of printed elements?
Marketing – Marketing is similar to sales in that it is a necessary expense to drive revenue. The big question here is: are you monitoring your marketing metrics to see what is working and what needs to be adjusted? While we do not necessarily advocate cutting marketing expenses, we do suggest making sure your dollars are being used as efficiently as possible. This may be accomplished by switching up your tactics or messaging or cutting the tactics with the lowest ROI and beefing up the tactics that are producing well.
Employees – Lay-offs are a last resort, but is it possible to reduce hours to better suit workflow? If you do have open positions, would it make more economic sense to contract those positions rather than hire a full-time employee?
Vendor Agreements – If you have not looked at your vendor terms in a while, now is a good time to review them. Are there areas that you can renegotiate for more favorable terms, like volume discounts? Are you paying bills on time to prevent late fees?
Manage receivables – Work with your Accounts Receivable team to get a sense of how your current customers are paying you. Do you need to adjust your payment terms to shorter windows, implement late fees, or add more payment options for your clients? Keep in mind that new payment terms can easily be implemented with new customers, but if you are changing terms with existing clients, you will likely need to provide a 30-day notice.
Debt management – Talk to your accountant about whether it makes sense to pay off any debt you have. Some advisors suggest removing debt as much as possible while others suggest maintaining minimum payments to keep cash on hand to cover necessities, such payroll, insurance, etc.
Staying on top of your financials will be a huge asset in managing your business through a recession. The more information you have on how your business is performing the more comfortable you will be in navigating your business through the recession.
If you need assistance in building your financial reports or analyzing the data, we would be happy to assist. Contact us at 505-850-3908 or drop us a note at email@example.com.