Economic instability can happen at any time. Preparing in advance for a potential downturn may help you hang onto your business when a period of volatility emerges.
As of writing, the current risk for a recession hovers around 20 percent, which may seem inconsequential to some business owners. While the prospect of an economic crash is minimal, these circumstances can change suddenly without warning.
To ensure your business survives economic volatility, adjust crucial areas such as how much cash you make and how much inventory you keep on hand. By monitoring your cashflow and your inventory closely, you ensure you are not wasting your money on purchasing product that is going to remain unsold during an economic downturn. The more prepared you are, the better your chances are for survival. Follow these four steps to protect your business from suffering a financial blow during a potential crash in the economy.
The key to surviving economic volatility is to have a plan. If an economic crash occurs with little warning and you have not prepared for it, you may suffer more financial losses than necessary. To prepare, spend time assessing your company’s risk. This will help you figure out how hard your company may fare in a downturn.
Certain sectors are hit harder than others, so you may not lose as much as businesses involved in vulnerable industries. For example, health care businesses typically do better during times of recession than do retail businesses. Therefore, if your company is centered around a health care service, you may require less preparation when it comes to protecting your assets.
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If your business deals in a cyclical sector such as construction, you will need to prepare well ahead of time to ensure your business survives economic volatility. Regardless of what different reports are saying about when or what to expect during a recession, it is best to approach your business plan from a mindset of preventing total loss.
If your company is going to survive a recession, retaining as much cash as possible is essential. When your sales begin to decrease, your operational expenses may decrease to reflect the change in revenue. You may be required to lay off employees to ensure the company stays afloat. The fewer employees you need to pay, the more money you retain in your company accounts until the recession has ended.
Companies that offer trade credit must be diligent in collecting payment during a recession to ensure they do not suffer financially if the recession goes on for longer than anticipated. If you are not collecting outstanding debts, you are putting yourself at a higher risk of losing your business. You may be tempted to provide services or ship products regardless of whether you have collected a payment, but this needs to be avoided to ensure you are not hemorrhaging money.
The primary goal during a period of economic volatility is to retain as much cash as possible. Ultimately, the best course of action for achieving this goal varies from one company to the next, so you will need to determine your options for keeping your cash reserves from disappearing.
In addition to monitoring your cash flow, keep an eye on the inventory you currently have within your business currently. Additionally, be sure to monitor the shipments you have set for delivery over the coming weeks. You do not need to keep items fully stocked during a recession, as you are less likely to sell through your inventory when the economy is struggling.
If you continue to order products as you would during a time of economic security, you are essentially draining your cash reserves. This is a problem because it may prevent you from spending money on aspects of the business that are more crucial to maintain.
If you are struggling to sell through a limited inventory, consider the idea of liquidating your inventory to keep as much cash in your business account as possible. You may need to liquidate your inventory for cents on the dollar, but this ultimately allows you to retain some financial stability heading into the oncoming weeks of the recession. Retaining some of your cash is better than losing everything simply for the sake of holding onto your inventory for as long as possible.
When your business is entering the economic downturn from a place of financial stability, you are left with the possibility of purchasing new equipment, real estate or additional businesses during this time.
To qualify for this type of opportunity, you need to have already made the necessary cuts to ensure your business remains financially secure through the remainder of the recession. Otherwise, you are simply risking more money in achieving this goal.
Often when other companies struggle to stay afloat during a downturn, they attempt to sell equipment or real estate to help supplement their expenses. This means you may spend next to nothing to acquire new property for a business expansion, or you may be able to purchase new equipment you would not be able to afford otherwise.
Making acquisitions during an economic downturn leaves you poised to make a higher profit once the economic balance has been restored. Additionally, if you make acquisitions during a recession, you are more likely to receive approval for added credit lines from various banks and lenders. Banks prefer lending to healthy companies, and the acquisition of new equipment, businesses or real estate proves to the bank you are financially stable.
Banks suffer from an economic downturn as well, so being able to provide business loans or an added line of credit to help you expand your business is beneficial for the bank or the financial lender of your choosing. This provides you with an opportunity to expand your business and to set yourself up for further stability if another recession hits in the future.
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