Is there a recession coming? We don’t know what the future holds, but it’s always important for your small business to be ready for anything – which can include economic downturns. Making sure your business is protected should be a top priority as you move into the future. So what does that look like in practice? Here’s how small businesses can cut costs and improve their cash flow during a recession.
A good barometer for determining whether you’re ready for a recession or not: Make sure you have six months of costs covered. That means EVERYTHING it will take to run your business, from overhead to payroll. That might sound like a big number right now, but the closer you can get towards it, the better chance your business has if it has to regroup and try something new to find clients. Remember, a lot of these fixes aren’t always immediate, so it’s important to give yourself a runway so that you can make these plans work.
Simon Sinek wrote a really helpful book called Leaders Eat Last. In it, he talks about the importance of acting like a “real” leader and stepping forth to make positive differences for your employees. That’s also a good business practice. It might be tempting to lay off some of your staff when an economic downturn happens, but oftentimes this actually leads to more costs for your business.
From finding new folks at higher salaries to losing business, laying off employees can get expensive for you very fast. Plus, it’s terrible for morale. INSTEAD, try staggering time off. Staggered unpaid time off can help employees feel some amount of agency in their position. You’re being honest and letting them know that things are tough, but that you value them and you don’t want to lose them if you can have it. Sure it might sting for a while, but they’ll ultimately appreciate the respect and opportunity – or they’ll leave and find a new job, which is OK too.
Usually we have a one-size-fits-all approach to our budgeting, but that’s not always the case in real life. Have a budget for when times are good – and an option for a stripped-down budget in case you run into some speed bumps. While staring down a recession, you may want to create a budget by creating models that cut your revenue by 10, 20, or even 50% to see what revenue loss you can survive on. Another concept is to reverse engineer your break-even point, to know at what sales level you would start losing money at. When you can plan for how the money works, you can start making action plans to handle each scenario.
A cost analysis is a way to look at your business's history at a glance. You’ll want to do several versions of this to get the best picture of your business’s expenses. That means a 3-month, 6-month, and 12-month review. In it, you’ll want to look at ALL the expenses you pay. That can include recurring subscriptions for software, professional memberships, and even your marketing budget. Ask yourself, when was the last time we used this, what type of benefit are we getting, and is this something we absolutely need? If you don’t need it right now, get rid of it.
No, we don’t mean this literally. “Sticky” businesses are ones in which a client will return over and over again, instead of just one-off fixes. To do that is going to require some planning. We recommend the 3 x 3 x 3 concept.
Basically, you should make sure every client has three different points of contact with your team, and three of your employees should try to provide three different services. They don’t have to be the same services every time. Take Kaizen, for example — we might provide payroll, HR Software, and an advisory role for one client, but payroll, accounting, and tax planning for another. Fulfilling multiple needs for your customer is a great way for your team to become an integral part of your customer’s life and/or business.
This is related, but bundling your back office is a great way to consolidate some costs and create efficiencies. If you’re already using a CPA for one task, ask about how they might help in other areas. Often, it’s less expensive to go through one company rather than three and can save time in needing to communicate with multiple vendors.
It might seem like a no-brainer, but the easier it is for your clients to pay you, the more likely they will do it. That can take a couple different forms. You might start taking credit cards for your invoices. You might integrate an online invoicing system. You can also do things like offer better terms if clients will pay faster. For instance, 1/15 net 30 terms, which basically says if you pay us within 15 days, we will give you a 1% discount if the invoice is due in 30. You can also offer to automate payment and collection via ACH or credit card. All these options are valuable to your clients. It’s handy and less expensive for them, and YOU’ll get paid faster. That’s a win-win.
This is one that you’ll have to do ahead of time, but it’s worth thinking about. Negotiating the right terms for payment with your vendors can make all the difference. You’ll want to pay by statement rather than cash on delivery. Not only does it make your business look more organized, it can also give you some breathing room just in case you need a little extra time to pay a vendor. You will want to make sure that you payment terms are at least in line with how fast you collect from your customers. You don’t want to have to constantly front the expenses for jobs while waiting to get paid.
There you have it — 8 ways to make sure that your cash flow stays strong even during a recession. Do you have questions about any of these? We’d love to talk about it with you.