Prepare Your Business For A Recession
While different countries and industries slip into recessions at different times, the potential for a recession to impact your business and your customers is always prevalent. With so much economic, political, and trade uncertainty looming, it's a good idea to build a "recession preparation plan" before you need it.
To help you get started, we've compiled a list of eight strategies you can implement now to better ready your company to face a future recession.
1. Build a cash reserve
The recommended supply of cash you should have reserved varies depending on who you ask, but the average suggested amount is between 6-12 months of operating expenses. There’s one wrinkle to this: Money just sitting in a bank and not working for your company is a wasted resource. You’ll have to do some careful balancing to make sure your money is in the best place for your company.
Trade credit insurance from Euler Hermes can help tip the scales in your favor by securing your accounts receivables, making cash flow forecasting easier.
2. Safeguard your cash flow
Cash will always be flowing out of your business, never fear about that, so you need to secure and protect the cash coming in to your business. Communicate often and clearly with those companies who owe you money. Make sure they are used to your billing patterns and practices. Remember, they will also face hard times when the recession hits (and might even be reading these tips, too)—weather the storm together. Remind them of how important they are to your business and vice versa. Become indispensable, so when they pick which bills to pay first, your company’s invoices are always on top of the stack.
You can also maximize your cash conversion cycle by reducing Days Sales Outstanding, offering your customers early payment discounts and providing good collections practices. One customer defaulting on an invoice can be devastating, especially in a recession. Euler Hermes’ trade credit insurance makes sure you get paid even if there is a nonpayment, which reduces the impact of a bad debt on your cash flow and profitability. For more tips on this topic, read the related eBook, How to Avoid Non-Payment from Customers.
3. Establish your creditworthiness
Always make sure your payments to creditors are on time. In fact, be early if you can and pay off your debt if possible. This will give your business a favorable behavior score. As Laura Faulkner, VP of Marketing for Credit One Bank, points out, “Most banks use a behavior score when making credit line decisions....”
Once you have a good behavior score, it’s time to push creditors for longer terms (net30 or more), discounted terms (2/10, net30 - where you save a percentage if you pay early), and even larger lines of credit. Renegotiating credit terms before there’s an economic event is the best way to be prepared when things get rocky. With Euler Hermes protecting your incoming cash flow, staying on top of payments to your creditors is easier than ever.
4. Examine and evaluate operating costs
Reduce your expenses but do so smartly. Renegotiate the lease for your office space, find less expensive office supplies, and reevaluate the services your business really needs to survive. Trade credit insurance is a very cost-effective way to insulate your business from the destructive winds of recession. It normally costs only a fraction of a percentage of the amount insured.
And finally, examine your staff. If any employees need to leave, make that happen before a recession, not during. Make sure any layoffs are done with lots of thought—you don’t want to damage company morale or shrink your staff so much you won’t be able to properly provide for your customers.