Updated: Oct 10, 2022
Depending on whom you talk to, the US is either in or rapidly approaching another recession: two consecutive quarters of negative gross domestic product - the value of all the things we sell collectively.
If you’re not feeling the downturn in your business now, that doesn't mean you’ve escaped it - consumer buying power will continue to be affected. The average US recession lasts anywhere from 1 - 2 years.
So how can you protect your business during a recession?
One of the hardest things about running your own business is managing uncertainty, and that feeling is of course amplified during a recession.
You want to know what will happen, so you can plan and react in the best way possible. Of course you can’t know exactly what will happen, but there are things you can do that will help you find needed changes you can make now, and see enough into the future that you will be ready to pivot when and if you need to.
Here are 6 important things to do for your business during a recession, and below the list is an explanation about a financial forecast, and how it’s the tool that will help you look ahead at your sales, profit and cash by bringing all of your business assumptions together.
Cut the fat. Probably the most obvious item, but it bears saying. Take a look at your fixed expenses and see if there’s anything you can do away with, or negotiate down. Sometimes there are lingering fixed expenses that we just don’t need that get overlooked. A little here and there can add up.
Negotiate! The power of communication is the secret sauce here. Look at any vendor contracts you have to see if the terms can be renegotiated. Or if any of your contracts or open purchase orders are near completion. In either case, work with your vendors to get the best arrangement possible for payment terms and pricing. They will be feeling the crunch too and so while it may feel uncomfortable to raise the subject, they will actually appreciate your planning and advance communication. They may even become more of a trusted partner because of it.
Tighten AR. Look at your own terms for cash collection with your customers, and the rate at which you are collecting. Are you able to collect within your current terms? And if so, can you tighten the payment terms a bit? For instance, if you offer a 30-day window to pay, can you reduce that to 15? Or even 20? Even 10 extra days can make a world of difference to your cash flow.
Do you offer services at a fixed fee? If so, you need to be on top of your estimates to complete. Most people will talk about managing the scope of fixed-price work, and that’s true, but the most important element is your estimate to complete the project. Each week you should draw a line and estimate what it will take you from now to complete the work. If that amount is more than you have left to invoice, then your profit on that project is at risk. You need to either determine how you can complete the project within what you have, or "eat" the loss, or increase the price with a change order.
How’s your marketing? Maybe it sounds counterintuitive, but putting a little more into marketing is often a good idea during a recession. Can you redirect any savings from your expense-cutting efforts to marketing? Maybe there is a demographic you haven’t reached yet, that a new campaign will help with.
Set aggressive sales goals and write them down! Research shows that when goals are written down we are 42% more likely to achieve them. Plan your sales goals by month, and create sales projections. These are the first part of a profit and cash forecast. More on that is below.
Profit and cash forecasting during a recession
It’s always important to have a profit and cash forecast to manage your business. And during a recession, it is more important than ever.
The 6 items above are examples of key elements that feed a forecast to make it more accurate. Unlike a budget, a forecast is a model, based on business rules, assumptions, and projections. To illustrate this we can use the examples from the list above.
Business rules are things like your payment and collection days.
Assumptions are like your project estimates to complete, or your marketing spend.
Projections are your sales goals and associated costs to produce the things you sell, as well as all the numbers you are estimating.
The forecast model creates a longer look ahead at profit and cash, up to 3 years, and your forecast will also be measured and refined each month as you compare it to actual results. The forecast will help you feel more confident about what will happen, and make adjustments now that will benefit you down the road. The forecast truly becomes your roadmap for building your business.
And so during a recession, it’s not only important to stay on top of your key business rules and assumptions but to bring them all together into a profit and cash forecast, which will show your future profit and cash.
Want help with forecasting for your business?
Take advantage of our template, or book a call to talk with us today! We are experts in financial forecasting for small businesses.