The unpredictable ups and downs of an economy can really put small businesses through the wringer. The COVID-19 pandemic is an example of a turbulent economy that small businesses are struggling to survive in. Most businesses don’t emerge unscathed from a recession. But careful preparation can mean the difference between landing in the recovery room or the morgue. Give your business its best shot at survival with these five strategies.
1. Diversify revenue.
A recession has a way of spreading through the supply chain. It could hit any of your buyers before you, and their problems quickly become your problems. That’s why your revenue shouldn’t be heavily dependent on a few customers.
Diversifying lines of revenue enables businesses to create multiple opportunities at different time intervals to generate revenue. For instance, if one line of business generates the most revenue in certain market economics, it’s important to analyze other economic conditions that may arise where an alternate service offering may help generate revenue. This keeps the pipeline thick at all times. Look over your customer mix. If any single buyer represents more than 10% of your business — or your top five clients together account for more than 25% — you need to diversify.
2. Stay On Top Of Your Expenses
Any time there is financial instability (whether it’s due to the economy or company shortfalls), the first step is an obvious one: reduce discretionary expenses. This is the time to re-evaluate your company policies for travel, per diems, and office supplies. When times get lean, you’ve got to know what you can live without. Every entrepreneur should be able to spot the small indulgences that are eating away at profits without stimulating growth. Knowing the difference between what’s discretionary and what’s essential is critical.
You should have a healthy reserve of cash to cover payroll and a loss of income from a recession. At the same time, you should make sure that you don’t have any superfluous and unnecessary expenses. It’s possible to go too far with this — marketing is important, even in the direst circumstances. Nonetheless, you should scour every line item and trim the budget where it makes sense.
3. Keep Inventory Low
Take a walk through your warehouse. How much cash is tied up on your shelves? The inventory on the shelf may be harder to liquidate during a recession, so it is essential to know what you are dealing with. Learn to think lean about inventory, even to the point of bucking trends within your industry. Tesla is a prime example: The auto manufacturer has rejected the standard auto sales model and essentially makes its cars on demand. You might not be able to go that far, but ask yourself how much you really need on hand to meet demand. This might require more advanced methods of tracking, but the rewards in liquidity are worth it. A part-time CFO can help ensure your inventory tracking method is
4. Be Proactive With Tax Planning
If you are not working with a CPA, now is the perfect chance to partner with an accounting firm. Hiring a CPA or accountant has many business benefits that can help you understand your finances more readily. Additionally, don’t neglect the importance of a proactive tax strategy that adapts to the ever-changing economic climate when “recession-proofing” your business. The right CPA can help you be proactive and weather the storms. Opt for a proactive tax review that helps business owners protect themselves regardless of how the pendulum swings
*Limitless Investment & Capital has remote CPA’s available to help your business as soon as possible.*
5. Build Multiple Budgets
Build multiple budgets based on different revenue projections by quarter. Build a budget with all your expenses listed out based on what your revenue is now, and then build one with a 20% reduction in revenue and another with a 40% reduction. Then cut expenses until you have the same profit margin as you do now. Building multiple budgets can help ensure your business is prepared for whatever route it must take during a recession, and you can be equipped with financial information to make the best decisions possible. A local CPA can help you create multiple budgets for your business with many different scenarios at hand.
6. Offer New Products and Services
It’s easy for business owners to get comfortable with the products or services that have been successful for them in the past. However, broadening your line-up may be the key to surviving during the next recession. In fact, you may not even have to come up with something completely new. Instead, you might be able to repurpose your products for another market. For example, manufactured products used in the oil and gas sector could be effective in other areas with just a few changes. Research has shown that having a range of products and service lines can be an important form of diversification.
The Bottom Line
Being proactive is the best way to keep your business on track even as economic conditions change. Networking or hiring consultants may be the best way to develop a strategic plan to stay successful. Keeping tabs on your finances allows you to plan better, and see trouble areas in your business and react quickly.
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