5 Ways to Prepare your Business for an Economic Downturn

The best time to prepare for the worst is when a business is running smoothly. As they say, “the best time to borrow money is when you don’t need it.” It is true. 

For business planning, the best time to prepare for another downturn is when things seem too good to be true. You can act deliberately instead of reacting to adverse circumstances. In addition, it also allows you to implement various business strategies to ensure it survives. 

It’s been a decade since the last economic downturn. Though the economy has rebounded, and we are in the largest period of uninterrupted economic growth in American history, nothing lasts forever. What goes up shall surely come down. According to financial experts, the next recession is likely to hit in 2020 or the latest by 2021, and trade policy, geopolitical crisis, and stock market correction would be the triggers. 

These 5 tips shall help you prepare for any downturn that’s predicted in the coming years:

#1: Understand your Business Strengths

When recession strikes, you may have to cut costs in various small windows of time such as days or weeks, rather than months and quarters. This could lead to unnecessary errors, which can be easily avoided if you take proactive measures to start preparing for now. 

Tim Raiswell, Vice President, Gartner, said, “Recessions are not the right time for the executive to discover that it’s hard for business management to quantify and analyze external drivers of performance.” He also added, “Differentiate the value-driving portions of each business area from the areas where costs have not scaled intelligently or as expected.”

In fact, Raiswell also recommends “risks versus opportunities” or “heads versus tailwinds” framework to quantify factors affecting performance, such as input price inflation, competitor action, etc. In the cause of a shortfall, counteractions can be taken. 

#2: Be Debt-free – Pay Off All Previous Debts

Businesses may have to enter into debt in order to fund their operations. Whether you have borrowed money or you are using a credit card for the company’s expenses, you must clear all doubts. This is a basic step to prepare for a recession that could affect your business dramatically. 

If you owe money for business, create an aggressive plan and pay off as soon as possible. 

Matt Wolf, Joorney Business Plans head advisory said, “If you hit a recession and you’re maxed out on debt, you’ll have limited access to cash and minimal investors. Free yourself from debt before a recession hits.”

In addition, you must avoid taking on any debt unless you are in dire need to do so. Before resorting to debt, experts recommend that you should evaluate your budget and see how and where to cut costs and reduce expenditure. 

#3: Build your Capital Now

How’s your business doing right now?

Thriving?

Congratulations! This is the time that has access to flexible financial products such as a line of credit. 

The best time to create your line of credit is when you are in great shape. Otherwise, it would be a very difficult stage and you would be struggling for years.

Experts recommend setting up a separate emergency savings fund with, at least, three to six months’ expenses for business, just as you do in case of personal finances. 

The best way to plan ahead is to have a cash balance. Matt Wolf says, “Make sure you have a rainy day fund. If you have to access credit during a recession, make sure you have plenty available.”

#4: Explore New Opportunities and Business Models

While there’s nothing as a recession-proof business model, it’s a fact that a downturn impacts specific businesses and industries differently. Pay attention to the key metrics and leading indicators for your particular industry and business and set yourself up to discover new opportunities. 

Whether you are a product or service company, focus your efforts on the needs of people, not the luxuries. 

For instance, even during a recession, people would eat. So, food businesses would have a different impact on the downturn. Likewise, the sick would require medicines, and so medicine or pharmaceutical companies would face a different impact. 

#5: Get your Financial Projections and Numbers Right

Whether it is a good time or bad time for your business, it is very important to have thorough understanding of the financial projections and figures. Experts recommend creating a detailed projected income and expenditure plan at the beginning of the financial year. 

Business owners should always aim to develop, expand as well as diversify their sources of revenue while maintaining efficient expense management and operations.