For the past few months, fears of a recession have dominated the news and a lot of time has been spent worrying about what a recession could mean for businesses and individuals. A recession occurs when there is a decline in economic activity for two or more consecutive quarters. Recessions are inevitable and out of our control, but the only thing you can control is your response. Here are some preventive measures and precautions to lessen the effects of a recession.
- 1. Strengthen your cash flow
Strengthening your cash flow is key to protecting your business during an economic downturn. The inability to protect cash flow is a major reason small businesses have closed during the pandemic and in past recessions. We can confidently say that cash is king, but building it isn’t something you can accomplish overnight. Therefore, consult your financial advisor to carefully review and reduce your expenses to create a stable base.
The same goes for personal savings. You should bring in more income than you spend in monthly expenses. Now is the time to find out where your income is being spent and review your taxes, automatic deductions, health and life insurance, and 401(k).
- 2. Reduce your overhead
Inventory is one of the biggest overheads for every organization. Therefore, analyze your inventory report and data to ensure that you are not producing more products than you are selling. Regularly reducing your inventory will reduce your warehouse costs because you are no longer paying for products to collect dust. And, if you’re a service business, are you paying too much for indirect overheads like software, insurance, and janitorial services? Buy prices from different suppliers to get the most competitive price.
As with personal spending, list all the spending habits you and your loved ones have to maintain the lifestyle you’ve grown accustomed to. With a detailed understanding of your spending habits, you can find unnecessary expenses to cut and make a budget plan.
- 3. Focus on what you do best
Now is not the time to experiment with your products or services during an economic downturn. It’s time to double down on your specialty. Your best customers will never forget what you do best. The time to experiment or grow is during a strong economy, not a recession.
The same goes for personal savings. Now is not the time to buy that luxury Bahamas cruise. It’s time to save for rainy days and cushion your emergency savings. A good rule of thumb is to calculate your average necessary expenses (rent, bills, and groceries) and multiply the sum by three months. Increasing your savings can give you the cushioning you need to ease the stress associated with a financial crisis.
When money is tight, high-interest debt and credit card debt are the easiest to spiral into chaos. During a recession, most people only make the minimum payment, but they will continue to rack up new charges. If you can make extra payments to pay off your debt, you’ll save on interest charges and improve your credit score.
- 4. Generate competitor analysis
A recession is an opportunity to get ahead of the game and win customers from your competitors. Do a competitor analysis and take notes on useful business strategies. Do your competitors have a strong value proposition? Do they understand their audience better? Use this recession to gather information and find opportunities for improvement.
Lauren Garabedian Ruff, CPA, is Chief Operating Officer and Business Advisor at The Garabedian Group, Inc. in Fresno, California. She specializes in family business support, succession planning and taxation. Lauren has been practicing for ten years. To contact Lauren Garabedian Ruff, call (559) 472-7370 or visit www.thegarabediangroup.cpa.