This article originally appeared on Discover & Learn on August 18, 2022.
Recessions are significant, prolonged and pervasive downturns in economic activity, typically lasting six months or more. Plus, there’s uncertainty about continuing inflation, continuing supply chain issues, the ongoing war in Ukraine, and the evolution of the pandemic. The World Bank is also cutting its global growth forecast to nearly 3 percent for this year and next.
Typical challenges businesses face in recessions include reduced consumer buying power, more expensive debt, delayed payments on invoices, and declining sales. Here are five steps to help future-proof your business and weather tough economic times.
1. Forecast a range of scenarios
If the last few years have taught owners anything, the unexpected can happen. We have been riding a wave of uncertainty for a while — and when you’re not sure what will happen next, it becomes essential to prepare for various scenarios.
During such times of uncertainty, business scenario planning is a tried-and-true tool for business owners. Often defined as “what-if” planning, business scenario planning involves making assumptions about what the future will bring to understand how different situations may affect your business.
For example, if half of your customers decided your product or service was a luxury they couldn’t afford, how would it affect your cash flow? If a key supplier went out of business or the cost to service your debt rose too quickly, what impact would that have on your ability to run your company?
Scenario planning allows you to detect pitfalls, cash gaps or cracks in your business’ foundation before they happen.
2. Find ways to keep more money in your business
The old adage ‘cash is king’ has never been truer. For a business, maximizing the cash coming in while reducing the cash going out is even more important in a downturned economy.
Reduce your costs
If you look hard enough, you’ll find opportunities to reduce the amount of cash flowing out of your business. For instance:
- Review your office space needs. If your in-person workforce has been reduced, consider downsizing your space to reduce rent payments.
- Consider gently used vehicles, computers or equipment instead of buying new ones. Be sure to check that warranties are still valid to protect your investments.
- Review inventory and product lines to know what is selling and where it’s best to spend your time and money. Items that sit for too long consume cash without bringing cash in.
- Negotiate supplier terms and/or consider bartering for products and services.
- Examine your monthly expenses and see if there is an opportunity to trim utility, internet or cell phone costs.
- Run through all the publications, tools and programs you’re subscribed to figure out if there are any you can discontinue or even put on hold for a time.
Leverage other sources of money
- Raise capital from either investors or relatives.
- Negotiate strategic payment terms with customers. For example, offering small discounts for up-front payments from customers can help make a difference to your cash flow, even if it’s for less money.
- Sell assets you don’t need. Whether you have a surplus in investments, real estate or equipment, now may be the time to divest to shore up your financial position.
3. Look at your debt
Studies show companies with high debt levels are especially vulnerable during a recession. That’s because the more debt a business carries, the more cash is needed to make interest and principal payments. Suppose customer demand falls and less cash comes in the door. In that case, debt uses up precious resources — not only putting you at risk of defaulting but also forcing you to cut costs more aggressively, impairing your productivity and ability to act on opportunities.
Now is the time to closely look at your debt and cost of borrowing and find ways to either deleverage or consolidate debt to a lower interest rate product. An RBC Business Specialist can help you identify ways to optimize your debt.
4. Keep your customers and your employees close
Supporting your customers during difficult times will be important to keep them happy and engaged with your business. Get creative with how you reach them, how you sell to them and what you sell to them — consider emerging trends and communication best practices to give customers what they want.
In an economic downturn, owners immediately think of letting staff go to trim costs. While that may be a prudent measure when revenues drop significantly, your loyal team can help your business weather any bumps in the road. Ask them to share solutions to trim waste and install more efficient processes.
5. Invest in technology and digital solutions
While it may feel counterintuitive to invest in technology when money is tight, it may be a smart time to do so.
When the economy is thriving, you need to capitalize on your sales opportunities and produce as much as possible. But when you’re not operating at peak capacity, your operating budget may be freed up to fund tech investments without affecting sales. Digital transformation can help make your business more transparent, flexible and efficient.
Technology can help you cut costs and deliver improved analytics, so you can see how the recession affects your business even quicker.
Bottom line:
In a recession environment with high inflation rates, essentials become more expensive, and costs are carefully weighed and prioritized. Whether your business offers essential products or services — or sells luxuries that delight customers — the right preparation can help you survive and even thrive during challenging economic times.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
