A common definition of a recession is two consecutive quarters of negative GDP growth. While the debate rages on in the media and in Washington about whether we are currently in a recession, heading for a recession, or if we should altogether redefine what a recession means, business owners should be preparing for the very real possibility.
Since 1950, recessions have lasted from two to 18 months — a duration that can potentially put a significant amount of stress and strain on a business. Right now, the key for business owners is to keep things simple. Focus on the areas of your business that are necessary for its long-term health, which are your employees, cash flow, and operations.
Attract and retain top talent
Business owners must figure out ways to maintain staffing in a recession. According to the 2022 MassMutual Business Owner Perspectives Study, staffing is the No. 1 business concern (both in terms of losing staff and the ability to rehire staff) coming out of the COVID-19 pandemic. Many businesses are already running leaner than they’d like to be, but how do you attract and retain top talent when cash flow is tight?
- Motivate employees outside of monetary compensation. Offering intangible perks, such as flexible work scheduling — that includes allowing employees to take time off or work remotely — is one popular intangible perk.
- Cross-train employees. Investments in building employees' skills can help them feel more connected to the business and more willing to go the extra mile when they are called on to do so. It also gives you the flexibility to move employees to other parts of the business if staffing gets tight.
Remember that cash is king
Managing cash flow is another key area of focus. Now more than ever, it's critical to track the amount of cash that will flow into and out of the business month over month. It’s a good idea right now to also establish an emergency fund that can cover up to six months of business expenses, just like you would for your personal finances. In fact, after the COVID pandemic, 80 percent of business owners said they established some sort of emergency fund, according to the 2022 MassMutual Business Owner Perspectives Study.
After that’s accomplished, consider the following:
- Examine the next five months. Total all the cash you’ll receive and need to pay out. Then, look at whether your pricing needs to change due to inflation, supply chain issues, or changing consumer interests, and update financial forecasts accordingly.
- Determine who is most important. Prioritize the relationships you cannot lose — lenders, vendors, customers, etc. — and solidify those relationships with ongoing communication. One way to build loyalty is through negotiated flexibility.
- Establish what can help ease the burden. The fastest way to find cash is by talking with your key customers and suppliers. With customers, make sure they will be paying on time and, if possible, ask if they might accelerate payments if given a better deal. With suppliers, ask if payment terms are negotiable from perhaps net 30 to net 60. Also, remember that banks, credit card companies, and landlords are suppliers too. Reach out to them as well.
- Diversify your relationships. Remember that everyone is going through the recession and dealing with the same cash flow challenges as you, so not being reliant on a few customers or suppliers is important.
Be operationally efficient
Finally, gauge the health of your business by analyzing operational efficiencies. The good news is many business owners probably recently did this during the COVID pandemic, but perhaps there are ways to go even further. It’s never a bad time to streamline operations. In fact nearly 60 percent of business owners believe that is the best way to grow business value, according to the 2022 MassMutual Business Owner Perspective Study.
Here’s where to start:
- Build a recurring revenue model. This can be done through subscriptions or auto pay. This strategy makes your customers more sticky when their loyalty is most important.
- Niche down. Niching down means to cater to a given need so that your business becomes the go-to for it. Dedicate resources only to products and services that your customers find essential and bring the most revenue (and the best margins) into the business.
- Carefully monitor inventory. Inventory on the shelves costs money and can become even more costly when it becomes susceptible to obsolescence, damage, and expiration. Consider downsizing the less popular, less profitable, and more easily replaceable inventory.
Keep in mind that not all businesses are affected the same way during a recession. The difference in outcomes is largely due to the types of products or services sold and how companies adapt to their customers’ needs. With proper foresight and planning, businesses can survive (and even thrive) no matter what the future economic picture looks like.
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