How Does Recession Affect Your Business?
When an economy reports negative growth for two-quarters back-to-back, it is said to be in a recession.
During a recession, economic activities slow down, unemployment increases, inflation rises, and household spending decreases.
All it means is less business and money flowing for local businesses in a recession. Small businesses can quickly default if they do not plan well for hard times.
The severity of a recession affects some industries and businesses more than others. However, all businesses in an economy get affected by a recession in one way or the other.
How to Prepare Your Business for a Recession?
Economic history has shown us that recessions are inevitable and recurring. We have seen global recessions (depressions) as well.
So, all you can do about a recession is to plan well and ahead of time to stay afloat when such a hard time arrives.
At Pelrio, we aim to provide the best insights to our partners on handling their cash flows, accounting, and other business areas.
Here are our top tips for you to prepare your business for a recession.
Create an Emergency Fund
Before you do anything to protect your business from a recession, create an emergency fund.
The first step to do that is to calculate your monthly expenses without any revenue. Then, cut out unnecessary expenses that would be wiped out if your business closes down.
Once you have a total of unavoidable expenses for a month, estimate an emergency fund of 3 to 6 months. You should start saving for this fund immediately.
If you already have an emergency fund, start contributing more and account for the inflation effect as well.
Create Flexible Monthly Budgets
Every business creates monthly budgets. Most businesses create rigid budgets that do not change during the month.
A dynamically changing business environment demands a new approach to creating monthly business budgets.
You should focus on creating more flexible monthly budgets to easily account for any unseen changes during the month.
Many businesses outsource tasks, appoint temporary staff, spend money promptly, and take instant decisions more often than before.
It means relying on static budgets will be an unwise approach. Flexible budgets allow you to create new categories easily and adjust whenever required.
Create a Comprehensive Plan for Your Business Cash Flow
When economic activities slow down, people start saving money due to a fear of recession effects. It means businesses see declining sales.
Slowing economies and recessions have a direct impact on the cash flows of a business. In practice, your business will see a declining cash flow than incurring losses.
Most businesses shut down during a recession due to cash flow issues rather than profitability problems.
You should create a comprehensive cash flow plan to deal with uncertainty and recessions. Using a compact accounting solution like Pelrio can help you create a dynamic cash flow forecast.
Collect Accounts Receivable Quickly
If you try to squeeze your clients during a recession, it wouldn’t help you collect accounts receivable quickly.
What you can do is offer them flexible payment terms during normal times. Allow them to stretch the accounts receivable period for a little longer than you normally do.
However, you must be careful as it will directly affect your working capital cycle. Do not allow clients to delay payments beyond a certain limit.
Keeping a balanced approach with your accounts receivable during the normal time will help you collect receivables during the recession. You will be in a position to ask for early payments from your clients.
Extend Your Accounts Payable Period
Similarly, managing accounts payable during a recession is tricky. Naturally, your suppliers and vendors will be asking for early payments.
If you created an emergency fund, you’ll be able to keep a consistent cash outflow for your business purchases during a recession even when your sales decline.
You should always try to negotiate extended payment terms with the suppliers and vendors against confirmed business orders during these times.
Again, creating a balanced approach here will help you manage cash flows and lower the impact of a recession on your business.
Reorganize Your Books
One way of managing your business cash flow, profitability, and other financial matters is to reorganize your account books.
If you are doing them manually, you’ll not be able to find where the money is going and coming from let alone business analysis.
Start using a comprehensive accounting solution like Pelrio to digitize and reorganize your account books.
With a digital account book, you can categorize expenses, track income streams, analyze cash flows, and forecast business growth accurately.
Negotiate New Terms with Suppliers
During a recession, businesses struggle to find revenue and cash flows. They start lowering their prices to attract customers.
If you can afford to do it, negotiate new terms and better prices during a recession with your vendors and suppliers. Most of them will offer you better terms against confirmed trade orders.
On top of that, if you had created an emergency fund, you’ll be able to finance these purchases at lower prices.
Refinance Your Debts if Possible
Businesses without an emergency fund would inevitably look for new debts during a recession. That in turn will further squeeze your business cash flows and affect profitability.
If you already have a business loan and credit card, try refinancing these debts during a recession with your bank before interest rates start increasing.
Central banks usually lower interest rates to support economic activities and attract more spending from businesses and individuals.
It is your opportunity to refinance business debts at lower interest rates and stay afloat during a recession.
Diversify Your Income Stream
An excellent approach to fighting a recession is to diversify your income stream. However, you’ll have to plan it ahead of time.
Here are a few ways to do it for your business:
- Look for a new customer base by appealing to a new demographic, area, or product.
- Enter new markets with existing products.
- Introduce new products in the same markets and increase sales.
About Pelrio
Pelrio is a simple expense & cashflow management tool that utilizes artificial intelligence to provide real-time analytics, dynamic forecasting, and expense control for small business owners.
Questions, comments, or feedback? We’d love to hear from you. Get in touch by sending an email to info@pelrio.com.
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