There have been talks since early 2018 of a possible global recession. The Covid -19 virus has now made it highly likely. Even more disturbing is that the answer to the question of how long this economic downturn will last and the level of financial impact it will have is largely dependent on the unknown variable of the Covid-19 virus and our ability to control it.
How a Recession Impacts a Business
An economy is said to be in recession when there is negative growth in income, employment, output, manufacturing, and retail sales, for at least a six-month period. This causes consumers to be more conservative with their spending, resulting in a drop in business revenue. Businesses will, in turn, employ cost-cutting measures, usually in the form of downsizing human resources and delaying or forgoing business expansions and/or other investments.
However, a recession may not be doom and gloom for everyone – in fact, some businesses flourish quite well. Therefore, your job is to determine whether your business stands to thrive or be negatively impacted from a recession, and plan for whatever the outcome.
With that in mind, here are some things you can do to be prepared for a recession.
Do Not Panic!
Having invested heavily in making your business a success, it is natural to want to protect yourself and your business against financial loss. However, you do not want to make any hasty financial and/or investment decisions that will cause more harm than good. Ensure your decisions are data and fact-driven, rather than emotional.
Organize Your Financial Information
It may be the last thing you want to look at right now, but your financial statements are an essential tool in recession planning as they can be your earliest warning system to determine potential negative impacts and opportunities. If you do not have proper accounting records, now is the time to get those numbers in order.
With your financial data organized and up to date, you can do some basic assessments. Your revenue pattern will give you an indication of the extent to which your products and services are sensitive to economic changes, if at all. Your expense pattern will help you to clearly see areas in which cost-cutting or redirection is needed. Your balance sheet will show your financial stability. For instance, should you settle all your liabilities today, would you still have cash remaining to run the business for another day, week, or month?
With this information, you can plan for periods of low cash flow, better negotiate with suppliers, reassess product and service offerings and prepare for opportunities.
Assess & Plan for Any Potential Impact
No one can predict with precision the impact a recession will have on a business. However, there are ways to conduct sound analysis. One such method is through financial modelling. This is where your accountant reconstructs your financial statements to simulate different business scenarios. You then use this information to create key financial indicators that will drive your decision making through this period. For instance, you can model your financial statements to show the potential impact of losing say 20% of your customers versus lowering your prices, giving you some level of foresight to plan for such an eventuality.
For this to work, you must consistently maintain proper accounting records going forward. Equally important is the need to keep abreast with business news at home and abroad. Analyse and adjust your financial forecast frequent to reflect new economic trends as they emerge.
Seek Out New Opportunities
You may be anxious for things to go back to normal, but this down time can be a blessing in disguise. Use this time to brainstorm new innovate ways of doing business, dust off the business plan or even make a list of the things you could have done better. During a economic downturn or period of economic uncertainty, everyone is seeking to enhance or find new avenues for earning. As such, you may also find that persons are open to partnerships. So complete that proposal and make that pitch – remember you are not only planning for a recession but also for bouncing back.
Last Word
Being able to quickly spot economic trends that can be an indicator of opportunities or risks is what will help you to successfully navigate a recession cycle. It is therefore important to frequently assess your financial position, analyse new information as it becomes available and be proactive in your business decision making.
All data and information provided on this blog is for informational purposes only. This information is of a general nature and is not intended to address any circumstances of an individual or entity. We cannot guarantee that the information therein is accurate as at the date published or that it will continue to be accurate in the future and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. You are urged to seek appropriate professional advice that is specific to your situation.
