Strategies to survive an economic downturn

Strategies to survive an economic downturn

The start of 2023 has already seen major US and European banks collapse, triggering fears that we may be at the start of a new financial crisis. Whether that is the case will only be known when we are looking back in 5 years, but smart business owners will be planning accordingly.

So what should you be doing now, to ensure your business survives?

1) Get to grips with your Key numbers

This should be something that you are managing anyway, but is especially important if times are tight.

So get out your spreadsheets, talk to your accountant and make sure you have the latest accurate versions of your key figures, then repeat this process regularly to stay on top. Monthly should be the bare minimum, though weekly or daily will allow you to spot issues and react faster. If your sales and expense data is held in a software system (CRM, accounting package etc) then look into setting up real-time dashboards so you can check and analyse on demand.

Cash on hand - Simple one to track, how much money do you have readily available in cash or an instant access bank. This is the lifeline to your business.

Aged Debtors - How many people owe you money? How long have those invoices been due? With any global or national downturn financial struggles flow from one company to the next. If your customers aren't paying you on time it can affect your ability to pay your bills, even if your sales numbers look healthy.

Aged Creditors - How much money do you owe to your suppliers or lenders? Taking advantage of credit can give you some breathing space, but it is important not to let it build up to unmanageable levels.

Burn Rate - How much money are you losing each month? Hopefully none, assuming you can keep the business profitable, but if things do get bad you need to know and you need to know fast.

Runway - This term is most commonly used by early stage startups who have raised money and are trying to spend their way towards profitability, but it can also apply in a recession. To calculate take your cash on hand and divide by your burn rate. This tells you how many months the company will survive without making improvements or receiving a cash injection.

Churn Rate - What percentage of regular customers leave each month. This may not apply to all businesses but for any who have regular clients it is key to track. When everyone is looking to cut costs cancellations will increase across most industries. 5% might feel like a low number, but over a year adds up to 46% of your business gone. If this number starts to rise, take action quickly.

2) Review your expenses

The easiest way to boost profitability is often to cut costs, since these are under your direct control, unlike sales which depend on someone else's participation.

Staff - Salaries often make up a high percentage of a businesses expenses so is a key area to start. You should conduct a review of all staff and evaluate the value they bring to the business. This is never a nice process to go through, but is very important none the less. It is important to review the short and medium term during this and not make rash decisions that will cause more harm than good.
Redundancy costs will often outweigh the immediate cost savings, so running various scenarios through financial forecasts will help work out what moves make sense.
Also factor in the value of loyalty and retraining costs, when you support your staff through tough times you will most often be rewarded with a higher quality output.

Shop Around - Next review a breakdown of all of your expenses and sort them by the amount spent each month. Start at the top of the list and see if you can find any new suppliers who can offer a better price for the same quality and service. 
Try not to drop quality on elements that are key to your business product/services, but in non-critical areas a drop to a lower standard product may be fine.

Refinance - If you have any loans, mortgages, car finance etc then now could be a good time to discuss refinancing. Deals are likely to be less favourable than in a stronger financial situation, but should still be available. Banks will be much happier with you paying a little more interest rather than defaulting on the loan.
If you can negotiate lower monthly payments over a longer period it will help you survive and you can clear the debt once everything recovers.

Negotiate Terms - Whether talking you your existing suppliers or shopping around, see whether you can get better terms in any way. This can take many forms, from reduced prices, wholesale rates if you buy in bulk, extra services added for free or longer credit period before invoices are due. Get creative in what you ask for, the worst that happens is they say no, but every little gain will help.

3) Build an emergency buffer

The best time to have done this was a few years ago, but the second best time is now.

At a bare minimum try to build up the equivalent to 1 months expenses in a cash fund, that you keep separate from your primary account. If possible try to increase this to 6 months, but you might need to wait until this downturn is over, before building this level to survive the next cycle.

If available then look into available lines of credit. If you can take out a loan then now is time to do so, before the situation gets worse and credit dries up. 
Avoid taking loans secured against your primary home or assets you can't afford to lose, if it gets to that stage you really need to evaluate where your priorities lie - business or personal/family.

If you are still profitable, even marginally then start scraping those excess profits into your emergency fund.

Most recessions typically last 10-12 months but can be longer. By having enough to last a few months without any income it means you can survive many more months with some income maintained, plus careful spending.

4) Look for growth opportunities

While we have left this point for last, it is actually one of the most important and often overlooked aspects.

It is often said and rightly so, that millionaires are made in the downturns. The side effect of the panic, struggles and failures is opportunity, for those smart and brave enough to grab it.

When times are tough companies often reduce advertising budgets, meaning that there is a lot of affordable advertising available. If you can accurately track your Customer Acquisition Cost and Lifetime Value, then spending $1 on advertising which delivers $1.20 return is clearly a smart move. The key is being able to track spend and return precisely, now is not the time to waste money.

When companies are closing or laying off staff there becomes an abundance of talent available, who are willing to take a slight pay cut for safe employment. If you can quickly generate a profit from an increased headcount then hiring at a discount will boost your growth.

Many business will be forced to sell at a firesale, which means you can cheaply expand market share if you have excess cash on hand or are able to finance the deal.

Even if you don't have any excess cash available to spend, you can still hunt for opportunities. 
Try to find new ways to reach customers, by utilising social media, partnerships, getting out on the streets....anything goes if it works!
Offer new deals to attract customers switching away from your competitors, or collect market share if a rival collapses.
If needed pivot into a new market if there is more potential there for the short term.

Surviving an economic downturn is all about preparation, management and mindset. If you are truly determined to survive you can defy the odds and be one of the businesses that comes out the other side stronger than ever before.

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