It seems like just about everything in our daily lives is getting more expensive by the day, from vegetables to petrol. This is largely a result of the COVID-19 pandemic that we’ve been managing for the last 2 years, as well as the ongoing war in Ukraine.
Economic growth is slowing down and inflation continues to rise, meaning that it will be very difficult for a lot of countries to avoid a recession. Not since the GFC in 2007 have we seen a global economic event of this size and scale.
The reserve bank of Australia’s goal was to keep inflation at around 2 - 3%, but new data is suggesting that inflation will peak at 7.2% by the end of the year. Seven percent or more is very high for Australia, and if wages don’t increase to match inflation, this could lead to a recession. It’s a daunting thought, but it’s critical that you take steps to future-proof your business by planning ahead now.
How could a recession impact your business?
A recession is a significant decline in economic activity that lasts for at least six months. It is typically characterised by a decrease in gross domestic product, higher unemployment, and lower consumer spending.
A recession can be caused by a variety of factors, including a drop in consumer confidence, an increase in interest rates, or a decrease in exports. A well-managed economy will typically recover from a recession within two to three years. However, if the underlying causes are not addressed, a recession can turn into a prolonged period of economic stagnation or even lead to a depression.
So how could a recession impact your business?
1. Reduced cash flow
In a recession, there’s typically less money being spent by consumers. This reduced spending leads to less revenue for businesses, which in turn leads to less cash flow. Less cash coming in could make it difficult to meet their financial obligations.
2. Decreased demand
If consumer confidence and spending decline, there could be reduced demand for goods and services. As a result, businesses may cut back on production, which could mean layoffs and even further declines in consumer spending. The cycle can continue for some time, exacerbating the recession’s effects.
3. Operational changes
During a recession, businesses have to make operational changes and strategic pivots in order to stay afloat. While it might seem counterintuitive, many choose to invest in technology and automation at this time. This spend on software can help reduce the hours spent on repetitive tasks that can be easily done through the power of automation.
10 recession planning strategies to use in an economic downturn
Planning can be a tough process at the best of times, let alone when you’re trying to survive an economic downturn. But planning for the worst-case scenario is one of the best things you can do.
So what strategies can you adopt now?
1. Build a cash reserve
A cash reserve can help you weather a temporary dip in sales, unexpected expenses, or a recession. It also gives you and your team a peace of mind, knowing that the company has a financial safety net in place.
While building up an emergency cash reserve takes time and discipline, it's well worth the effort.
2. Protect your cash flow
By taking steps to improve cash flow management, you can reduce the risks of financial problems and ensure you have the resources you need to get through tough economic times.
One way to forecast cash flow and business performance is by using Xero Analytics. Forecasting gives you a clear view of what your cash flow is going to look like so you’ve got more time and information to plan. Forecasting scenarios which could simulate a recession is a great way to plan for anything and help you adapt to even the harshest of economic conditions.
3. Establish your creditworthiness and pay down any debts
Recessionary periods are often accompanied by a decrease in credit availability. When lenders are reluctant to extend credit, businesses with strong creditworthiness are more likely to obtain the financing they need to pay down any debts and continue operations. A debt review will help you highlight the highest interest debt to help you prioritise which debts need to be ahead of others.
In the same vein, it’s important that you chase down any debtors that owe your company money in order to help with cash flow. Xero and WorkflowMax can help your business get paid faster and on time.
4. Review your budgets, operating costs and expenditures and cut back where you can
One place to start is by looking at expenditures. Are there any areas where money is being wasted? For example, are you spending too much on advertising or office supplies? Cutting back can help to save money without impacting the quality of your product or service.
Another area to examine is your operating costs. Can you renegotiate your lease or switch to a cheaper supplier? Can you use technology to help make your business more efficient?
You might be forced to make tough decisions, but the goal is to make sure your business survives the recession so that you can thrive when the economy recovers.
5. Manage your inventory carefully
Inventory management is especially important when customers are cutting back on spending.
By carefully managing your inventory, you can avoid the dreaded "stock-outs", where you run out of items and can’t meet customer demand. It also helps you avoid overstocking, which can tie up valuable resources and lead to markdowns and clearance sales. Careful inventory management is essential for maintaining profitability and keeping customers happy.
6. Review your marketing strategies (but don’t stop marketing!)
One area that’s often reviewed during tough economic times is marketing. Many businesses slash their marketing budgets in an effort to save money, but this can be a false economy.
During a recession, consumers are more price-conscious than ever before and can be more loyal to brands they trust. So you want to continue to tell them about your special offers and why their business is so important to you. It’s also a good idea to spend some money on research to identify new opportunities and markets.
Reviewing your marketing strategy on a regular basis, even in good economic times, can help you to stay ahead of the competition and make the most of your marketing budget.
7. Make customers a priority
Loyal customers are the lifeblood of any business. They're the ones who keep coming back. Who spread the word about your business to their friends and family. And who help you stay in business.
That’s why you have to make sure to treat your customers right. Give them the best possible service, offer fair prices, and show them that you appreciate their business. Do that, and you'll have customers for life.
8. Plan for the long term (and all potential scenarios)
While it's important to be agile and adapt to the ever-changing landscape, it's also essential that you plan for the long term. By taking a proactive approach and anticipating potential problems, you can minimise the impact of unforeseen events.
By planning for the worst and putting measures in place to weather the storm, you can increase your chances of survival. In the short term, this may require some sacrifices, but in the long term, it will be worth it.
Businesses that take a long-term view and plan for all eventualities are more likely to succeed over the life of the business.
9. Manage your staff and up-skill employees where possible
During tough economic times, it can be tempting to cut back on employee training and development. After all, there’s less money to go around. But investing in employee management and up-skilling can help you not only survive, but thrive.
When employees feel supported and empowered, they’re more likely to be engaged and productive. Up-skilling your employees in all different types of roles within the business can help spread the load and help out departments that might be feeling the pinch more than others.
10. Develop innovative practices
By investing in technology and automating processes, you can become more efficient, and save time and money in the long run.
Using a tool like WorkflowMax can help you keep track of your non-billable time and develop a strategy to close that gap. It also lets you see profitability across your jobs and manage your staff for maximum efficiency.
With this laser-focus on costs, you’ve got the objective information you need to help decide what can be trimmed and what costs are necessary to the business.
To learn more about how technology can help you recession-proof your business, book in for a demo.
James and Shaun are Senior Advisors at BlueRock, a multi-divisional professional services firm providing support to entrepreneurs and business owners. BlueRock takes a holistic approach to business and private wealth, with services across accounting, law, insurance and digital. James and Shaun are both experts at helping businesses manage their cash flow.
Managing Director, BlueRock Bookkeeping and Health
Shaun is an experienced Chief Executive, Consultant, Coach, Facilitator, and current Managing Director of BlueRock Bookkeeping and Health. Shaun prides himself on getting the best outcomes for all of his clients.
Associate Director, BlueRock Accounting
James is an Associate Director of BlueRock Accounting. James has many years of experience in the industry, with an impressive list of clients. He is well known as the ‘go-to-guy’ when it comes to helping clients with their cash flow issues.