Possible Recession on the Horizon – Do This and Not That
Recession talk is everywhere today. In fact, some experts say there’s a 96% probability of a U.S. recession. Naturally, many business owners are concerned about the future.
While no one knows for sure what the future will hold, one thing business owners can do is prepare. A recession may hit, or it may not. But if you’re prepared, you have peace of mind that you know what to do in the worst-case scenario.
With a possible recession on the horizon, you should do a few things to prepare your business.
Review Budgets and Plans
One simple way to prepare for a possible recession is to review your budget and plans to see how an economic downturn may impact your operations.
First, create a budget for the year ahead. Then:
- Create a plan for the next year or two
- Run what-if scenarios and forecasts
Scenario planning and forecasting will serve as guides when reviewing your budgets and plans for the coming years. For example, you can simulate what may happen to your operations if sales dip 10-15% or more. Having a clearer picture of the impact of a recession on your business will allow you to plan more effectively.
Remember that no one can predict the future with certainty. Don’t expect the worst, but have a plan in place so that your business is prepared if a recession does hit.
Work on Your Efficiency
Improving efficiency is always beneficial for a business, but efficiency can really make a difference during a recession.
Leverage technology to make your operations as efficient as possible and maximize your team. Provide your team with the right tools, machinery, and tech to get their jobs done as efficiently as possible.
One way we’ve improved efficiency at our firm is by using scanning software. This time-saving tool scans employee W2s, eliminating the need to type this information in manually into our tax software.
Also, take a closer look at your most efficient employees. What are they doing differently? Is there anything you can learn from them? Can you train other team members to be as efficient as them?
Working on your efficiency now will ensure that you’re prepared if there is an economic downturn. If the worst doesn’t happen, then you still reap the benefits of getting more done with fewer resources.
Build Up Your Cash Reserves
One practical way to prepare for a recession is to build up your cash reserves. There’s no one-size-fits-all approach here. How much you need will depend on your industry and individual business. Aim to have enough cash in the bank to meet your goals.
Some companies may need 3 months of cash, while others may need 6 months in cash reserves.
If you’re not sure how much cash you should have in the bank, consider consulting with an advisor and running cash flow forecasts to determine how much cash your business will need.
Consider a Line of Credit
Does your business have a line of credit? If not, consider applying for one now. It will likely be easier to secure a line of credit now than if the economy dives.
While a line of credit can help keep you afloat during a recession, it’s important to remember that banks can terminate them if things really go south. Don’t rely on a line of credit entirely. Treat it as a back-up plan or worst-case scenario use.
Another thing to consider is risk and cost here. Borrowing money comes at a price. Is it worth having this cash available when needed and paying the high-interest rate for it? Again, every business is different, and you have to decide what makes sense for yours.
Trimming your expenses will benefit your business regardless of whether a recession hits. Review each expense critically and consider whether it’s truly necessary.
- Where are you spending money that isn’t directly contributing to your business?
- Do you have upcoming expenses that may need to be reconsidered in case of a recession?
- Can you negotiate or renegotiate contracts with vendors and suppliers to lower costs?
Finding ways to reduce your business expenses will make it much easier to weather the storm if a recession does hit. If things go better than expected, you reap the benefits of higher cash flow and profits.
Adjust Your Pricing
Now is the time to adjust your pricing. The cost of everything is going up, from food to gas and everything in between. Consumer prices increased 8.5% for the year ended March 2022. Your business costs are rising, too. Raise your prices accordingly.
Most customers or clients will expect you to raise prices, and they will be happy to pay the higher price. If some clients push back, don’t overreact and reverse your decision. It’s normal for a small percentage of clients or customers to react negatively to higher prices, but most will understand and be fine with the increase.
Raising your pricing will do a few things to benefit your business in case of an economic downturn.
- If your prices are higher and a client asks for a discount later on, you will be in a better position to negotiate.
- It will help you build up cash reserves, which will help you stay afloat if there is a recession.
If you decide not to raise prices for some clients, make sure that they know you didn’t raise their prices. In the future, they will be less likely to ask for a discount because they know you could have raised prices and didn’t.
Start Preparing Now
Whether a recession hits or not, it’s crucial to start preparing your business now. Taking action and planning for the worst-case scenario will keep you from being blindsided by an economic downturn.
Start by reviewing your plans and budget. Then, take steps to improve efficiency, build up your cash reserves and adjust your pricing. Having preparations and plans in place will give you peace of mind that you know which decisions to make if a recession hits.
To learn more about preparing for a recession or to schedule an appointment, click here.