Recession. We are hearing about a potential recessionary time and economic downturn. Whether it is true or not, in our economy there are always boom and bust cycles and your business might also feel upward growth followed by a downturn. As we know, with COVID and injection of cash into the economy, we witnessed exponential growth in mid to late 2021.
However, it also led to unprecedented inflation which enticed the Fed to hike interest rates which leads to yet another unintended consequence of potential recession with GDP at -1.5% estimated for the second quarter. In addition, fear of recession is an accelerator of recession; this is where there are predictive factors of a recession. In response to that, businesses started to tighten up their finances – we have seen layoffs, hiring freezes, rescinded offers, and downsizing attempts.
This could also be due to a new reality with tech evaluation and the end of their astronomical growth. But, it can also mean that these companies are afraid of recession, loss of revenue, and are preparing for the inevitable, to which they may have contributed. It is a self-fulfilling prophecy and fear of recession accelerates recession.
It’s also important to note the paradox of the possibility of a recession coupled with inflation at a 40 year high (CPI = 8.6%). Higher inflation is usually correlated with a growing economy but now with a potential economic downturn, a lot of small businesses see themselves in an uncharted territory. This blog is to help small businesses brace for future uncertainties, and create healthy financial habits to recession proof your business.
Cash Is King…or is it?
It’s well known that inflation decreases the time value of money. This can be distressing since you are losing purchase power at 8.6%, which can outrun any potential growth you might have. Therefore, there might be a preconceived notion that cash is “bad” in this environment and is rapidly losing value and has to be converted to income producing assets or assets that are growing at a rate that outpaces inflation (8.6% as of May 2022).
For small businesses such as yours, this is different. Working Capital, “the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities”, is something you have to look out for. Your small business is different from your personal finances. Businesses rely on cash flow, and continuous capital injection for continuous operations, growth, expansion, and navigate through financial and operational challenges.
While we understand the concept of turning cash into growth-oriented investment vehicles is a good way to curb inflation in personal finance, when it comes to your business, the value of cash to your business is more important than the potential long term risk of value loss year over year.
With that being said, here are 3 ways to recession proof your business and navigate these uncertain times.
Update Your Pricing According to Your Costs
Inflation never discriminates – prices are up across the board, which includes your supply and labor as well. Therefore, it is a good time to review your financials and update your pricing to reflect the increased cost of business.
The way it can be done is for you to review your costs including Cost of Goods Sold, which is the core cost associated with you providing your product or service, and compare it to last year, and increase your menu or item prices accordingly. For example, if your COGS increased 18% Year over Year you can increase your product or service price by 18% as well.
This is difficult because business owners either don’t know their cost structure or they feel that increasing prices will drive their customers to the competition or they will lose business and look greedy to their community. So it is important to do this methodically and also compensate for it with a better service, closer ties to the community, offering new products and services, or a new experience for your customers.
Maintain Liquidity Equal to 30% Of Your Monthly Revenue
It is time to save up some cash. Recession also means your business future earnings may be fluctuating more than usual, and you may see your monthly revenue decrease as your customers’ purchase power shrinks.
It is usually advised to save and maintain cash equal to 20% of your monthly revenue. We increased this amount since this is uncharted waters with so much liquidity dump and inflation, followed by a forced depression, puts the economy in an awkward paradox. Which won’t matter so much to you if you have a strong cash reserve, and if you adjusted your price accordingly, you will have a safety net in case your earnings are not as strong as previous years.
Optimize Your Cost
Let’s say that you adjusted your prices and also made yourself comfortable cash savings; but what if your revenue and earning levels drop significantly? Can you still maintain your business? Sometimes recessionary times can cap earnings or make them so unsustainable. Therefore, cost optimization can reduce your risk of cash flow deficit and help maintain your business with a lower cost than usual so when your revenue levels drop, you can still keep your business running.
There are ways to optimize your cost and some of the example of that is:
- Re-negotiating with your current supplies and vendors or switching vendors (supplier, internet provider….)
- Reducing overhead costs and increase operational efficiency
- Adjusting operating hours (not operating during non-revenue or low revenue times)
- Lean operations and lowering management layers
- Lowering discretionary spending
- Maintain a lower and necessary inventory levels
Cost optimization is never fun and can be quite stressful but is necessary for your business to increase its chance of success during these times. Some can have more impact than the others. Always use the impact matrix to see if a certain cost optimization initiative is worth pursuing. You always want to choose initiatives that have a high impact on your cost and low impact on your operations.
In conclusion, an uncertain economic landscape is stressful but with the right preparation and initiatives, you can become successful and persevere as always!
We launched Gravity Capital to help small businesses meet their cash flow requirements with quick, easy, and flexible funding solutions.
Apply today to see how much your business qualifies for and to learn more about our adjustable repayment timelines.