Updated on September 6, 2022 by Webmaster
Small business owners have a challenging task in today’s financial climate. The country’s economy has shrunk for a second straight financial quarter which, by definition, is a recession. Unfortunately, when a recession hits, small businesses are hit the hardest.
During economic dips, a company’s existing customers have less cash to spend, while new customers are not as likely to walk through the door. These and other challenges often hit a small business the hardest since many don’t have a large enough cash cushion to survive the sales drop. Fortunately, you can take steps now to make your business recession-proof through proper cash management.
Let’s dig into what cash management looks like and how you can apply professional recession proofing to your own business.
Table of Contents
Understanding Your Expenses and Cash Outlays
The first step of managing your cash is analyzing your expenses and cash outlays and finding ways within them to cut costs. If you’re aware of a potential recession, look at everything your company spends capital on and find a way to save money before the crisis hits.
Your barebones approach to business doesn’t have to be permanent. However, in a challenging financial time, you should focus on building a recession-proof business rather than trying to spend money to make more.
That level of economic planning can be demanding during a hectic business cycle. However, accounting experts can put companies in a cash position to thrive through recessions.
Our team will help you step through the process to understand what your fixed and variable costs are and what you need to run your break-even every month in sales. Then, we’ll help you identify the items that you could eliminate from your budget if things got tough, as well as what you could maintain. Having those discussions and laying out that game plan before a problem arises will benefit you tremendously.
How a Cash Flow Runway Can Help
Cash runways are plans for what you want to do with your small business and where you want it to end up over three years. These plans are vital to recession-proof your company, as they can help you identify new revenue streams and solidify your client relationships.
Here, you will judge what personnel and adaptable technology your business needs to reach your three-year goal and identify ways to raise money for those employees and equipment.
Economic downturns can open opportunities for businesses to acquire market share and establish multiple revenue streams. With cash management services, you can identify those chances, expand your company, and gain the resources you need to satisfy your customer base.
Avoiding Extra Debt
On paper, applying for a business loan to secure capital until the unstable economic situation subsides makes sense. However, expanding your cash runaway with a loan during an economic dip can do more harm than good.
During a recession, cash is king. However, it probably is a good idea to not take on any additional debt during that time. During a recession, the interest rates are generally high because that’s how they’ve been able to slow the growth of the economy down. Therefore, taking a business loan is probably something that you need to hold off on because it just probably will be too costly of an interest rate to be able to get an effective return on investment.
Determining Your Cash Flow Runway
A cash runway must be concrete and carefully planned to recession-proof an entire business. To pull one off, you’ll need the following documents:
- P&L Records
- Accounts Receivable Pages and Financial Statements
- A Balance Sheet
You, or more likely your CFO or a financial consultant, will use that information to determine your current finances and your estimated profit margin throughout your cash runway. You will also need to use that data to project what materials or services you can pay for as your business grows and how much they will benefit you.
For example, if you want to reach new clients, you will need a formula similar to “To reach ‘X’ new customers by the end of our runway term, we need to invest ‘Y’ into marketing for ‘Z’ marketing services and equipment.” Those calculations aren’t terribly difficult and, once done, can be added to projections that go out for multiple years to help you avoid a cash shortfall.
The Value of Having Cash in an Economic Downturn
It’s difficult for businesses to keep their heads above water when the economy declines. One big reason is that business loans reach such high interest rates that they’re no longer a viable cash influx option for a small business.
However, recession-proof businesses have excess cash in the bank and don’t need to rely on loans or personal credit. Not only can that give a business the flexibility to wait until loans have lower-cost interest, but it can also give them the means to gain ground on competitors.
For example, while a business relying on loans will have to spend time repaying their high-interest rates after the nationwide financial hardship, recession-proof industries won’t have that burden. Therefore, they can focus on building an agile workforce to attract more customers.
How Much Cash Should a Business Owner Have During a Recession?
There isn’t a magic cash total that every business should strive for during a recession. Rather, your target cash reserves depend on the needs of you and your clients.
Everybody has different circumstances, so this is where it’s important to understand what your fixed and variable costs are.
For example, maybe, as an organization, you decide that you want six to eight months of fixed costs in the bank on hand so that you can make it through at least a six to eight months stint. Our team believes that those are discussions to be had with a business owner as to what they feel comfortable with, and we’ll sit down with your team to help you determine that fixed cost goal.
When does it make sense to spend money during a recession?
According to the National Bureau of Economic Research, the United States experiences an economic recession every six years. While that frequency might frighten some first-time business owners, it means that expert financial consultants like those at our company have studied what it takes to overcome financial difficulties.
One common trend among well-planned businesses is spending on outsourced services, including third-party accounting and IT teams. Those third-party teams often work part-time rather than through the whole work week, saving you cash on labor costs that you can apply to new equipment that satisfies your current customers’ needs.
On the other hand, temporary labor services are generally not that situation. There’s a very high markup with those so it’s often wise to stay away from temporary labor during that time.
However, businesses can do other things – like renegotiate utilities – to help manage cash flow during a recession, too. An experienced financial consultant will help you identify those opportunities.
Call Margin Authority Today
At Margin Authority, we focus on helping business owners manage their company’s financials for faster, more profitable, and more efficient business decisions. From financial risk analysis to cash flow optimization, our team is here to help your business leap forward.
Ready to achieve your business goals? Request a consultation today.