For some months now, fears of a recession have dominated the news and much time has been dedicated to fearing what a recession could mean for businesses and individuals alike. A recession is when there’s a decline in economic activity for two or more consecutive quarters. Recessions are inevitable and beyond our control, but the one thing you can control is your response. Here are a few preventative measures and precautions to mitigate the effects of a recession.
Strengthening your cash flow is crucial to protect your business during an economic downturn. Failure to protect cash flow is one of the main reasons small businesses shut their doors during the pandemic and in past recessions. We can confidently say cash is king, but building it isn’t something you can accomplish overnight. Therefore, consult your financial advisor to review and carefully cut your expenses to create a stable foundation.
The same goes for personal savings. You should bring in more income than you spend on monthly expenses. Now is the time to know where your income is spent and review your taxes, automatic deductions, health and life insurance, and 401(k).
Inventory is one of the highest overhead costs for every organization. Therefore, analyze your inventory report and data to ensure you’re not producing more products than you sell. Regularly reducing your inventory will reduce your warehouse costs because you’re no longer paying for products to collect dust. And, if you are a service-based business, are you overpaying for indirect overhead costs like software, insurance, and janitorial services? Price shop different vendors to get the most competitive price.
Similar to personal expenses, list all spending habits you and your loved ones have to maintain the lifestyle you’ve grown accustomed to enjoying. With a detailed grasp of your spending habits, you can look for unnecessary expenditures to cut back on and form a budget plan.
It’s not time to experiment with your products or services amid an economic downturn. It is time to double down on your specialty. Your top customers will never forget what you do best. The time to experiment or expand is during a strong economy, not a recession.
The same goes for personal savings. It’s not time to buy that luxury cruise to the Bahamas. It’s time to save for a rainy day and cushion your emergency savings. A good rule of thumb is calculating your average necessary expenses (rent, bills, and groceries) and multiplying the sum by three months. Boosting your savings can give you the padding you need to alleviate 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, yet they’ll continue racking up new charges. If you can make extra payments toward your debt, you’ll save on interest charges and improve your credit score.
A recession is an opportunity to get ahead of the pack and win over your competitors’ customers. Conduct a competitor analysis and take notes on helpful business strategies. Do your competitors have a strong value proposition? Do they have a better understanding of their audience? Use this recession to gather information and find opportunities to improve.
Lauren Garabedian Ruff, CPA, is the Chief Operating Officer & Business Advisor at The Garabedian Group, Inc. in Fresno, CA. She specializes in family business support, succession planning, and tax. Lauren has been in practice for ten years. To contact Lauren Garabedian Ruff, call (559) 472-7370 or visit www.thegarabediangroup.cpa.
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