How Finance Leaders Can Prepare for the Next Recession
Mission driven businesses are not exempted from what happens in the market. And because you’re a mission-driven company, it’s all the more important to know how to survive recession and thrive afterward. You built your company for a reason, and the world needs it. So you will need to keep your company alive despite the threats that recession poses.
But it’s also normal to feel panic when a recession hits. And panic breeds bad decisions. Making choices in the heat of the moment is a risky practice that can have catastrophic results for your business, especially when revenues are down over thin margins.
While there are no guarantees in economics, a recession can happen anytime. That’s why business leaders must prepare their mission-driven companies to weather the storm and come back stronger once it subsides. It may sound like a tall order, but there are concrete steps that mission-driven leaders can take to prepare for a possible recession.
In this article, we will be discussing some of the most effective and powerful ways you could use data to guide your business strategy during uncertain times.
Focus on your clients
Companies that neglect their clients, especially their most important ones, are doomed to fail. This is true during normal times, and it’s critical during times of hardship when your clients might be looking to save up and spend less.
Economic downturns affect everybody, and they are likely experiencing the same pressures your company is. Thus, it’s important to communicate with them proactively, provide actionable information so they can make informed decisions, and make sure you’re ready to support them when they need it. Remember to be straightforward and honest with them.
Know your industry
Some industries might be thought of as recession-proof. For example, people will still need staples, such as food and detergent. But they might look for cheaper alternatives. On the other hand, if you’re selling automobiles, you might feel a tighter squeeze as people wait to buy or look for used deals over new vehicles.
Any business leader worth their salt should be able to understand the dynamics of their industry and the segments they inhabit. If you have any questions about your company or industry, now’s the time to search for answers, not after you’re suffering from the effects of a downturn.
Keep track of data
Manage the risks by being proactive. Devising an action plan for any potential slowing of sales and profits helps you recession-proof your business. Some action steps you can take include:
Exploring risk reduction strategies
Identifying discretionary expenses and overhead that you can reduce or defer to maintain margins without sacrificing long-term growth plans
Considering near-term adjustments to your strategy, pricing, or product mix
Negotiating agreements with strategic suppliers or exploring outsourcing functions
It’s also essential to retain a flexible cost structure and business model. By doing all this, you can watch the data for warning signals and stay nimble.
Just because there’s a recession doesn’t mean business is going to be down for everyone equally. Some industries might do better under adverse conditions than others. It takes a lot of focus and preparation to find opportunities to turn a profit during a recession. Also, make sure that all your technology is sharp and in tip-top shape.
Practice cost discipline
If the economy takes a turn for the worse, you will likely need to cut costs. Look for places where you can generate savings, such as eliminating unnecessary costs. Even the smallest savings add up over time. Now would be the perfect time to protect your bottom line and demonstrate shared responsibility.
Reassess your compensation scheme
Even before a recession, it’s advisable to analyze your current compensation scheme. Keeping base wages lower and then providing generous benefits, such as bonuses or profit sharing, can be helpful for mission-driven companies during an economic downturn. It helps keep employees invested in the company while also helping control costs during tough times.
Focus on the relevant KPIs
To make it through a crisis, you’ll need to figure out how to keep revenue coming in, control costs wherever possible, and monitor cash reserves closely. Refocusing on Key Performance Indicators (KPIs) that are most relevant to those goals could help you find new and insightful ways to keep the lights on in your business.
Here are some KPIs you should be paying special attention to and why.
Customer churn. Focus on not losing customers. Pay attention to customer satisfaction scores and take action to retain customers before it becomes an issue.
New leads and opportunities. Fewer sales and marketing leads or opportunities coming in over a month translates to lower revenue down the road. So be sure to keep an eye on that number so you’re not caught by surprise.
Customer acquisition cost. It can become challenging to acquire new customers during a recession. So watch out for a corresponding rise in the cost to acquire them and optimize marketing strategies. You don’t want to waste cash on ineffective tactics, right?
Inventory turnover. Refine your supply chain and inventory plan for a recession. Monitoring your inventory turnover will help you adjust to the new levels of demand and avoid any unnecessary inventory costs (extra housing, oversupplying, etc).
Accounts receivable turnover. Maintaining your liquidity is the best way to survive financial hardship. Keep track of any customers who are lagging in their payments and come up with creative ways to collect.
Operating cash flows. Track the net cash flows from the daily operations of your business. That’s the easiest way to get a clearer picture of the impact that revenue and cost changes have had on your cash flows.
Cash flow runway. If your business is burning through its cash, it’s important to know exactly how long your reserves can keep the lights on. It serves as a limit on what tactics you can take to turn cash flows around and how long you have to implement them.
Prepare for the future
Tracking your metrics can only take you so far. It only becomes useful when it’s followed by effective planning. During a recession, the economy suffers for much longer than most business owners originally expected. You don’t want to be caught off guard. You never know just how long a downturn will last, so you must be ready for anything.
This is where scenario planning comes in. It’s a useful method to develop actionable strategies for multiple possible futures. It involves creating a range of possible outcomes and developing appropriate responses for each. Be sure to use accurate data for future projections.
It might be more comfortable to simply hope for the best. After all, as they say, ignorance is bliss—but it could also cause your downfall. The best thing that finance leaders can do in times of uncertainty is to prepare for the worst. That is the best path to business longevity. Model out the ugliest conceivable scenario for your company and take the necessary steps to protect yourself. Trust me, you’ll be glad you did.
Leverage financial planning and analysis
These tactics can help leaders bring their companies successfully through a recession. More than anything, mission-driven businesses need to make sure they are in a position of strength to take advantage of a rebound when the recession ends. With careful planning, nimble decision-making, and clear communication, downturns can quickly turn into opportunities.
But aside from recessions, any number of outside variables could have adverse effects—if you’re not prepared. Analyzing your KPIs and assessing scenarios can protect your company from any disaster situation. But it can take up a lot of time that you could be spending doing other tasks that will grow your business and create value.
In that case, you might want to hire a financial analyst. But in a downturn, you might be wondering: do you really need that expense?
Fortunately, financial modelling software can exponentially increase your planning capabilities without jeopardizing your cash flows. Jirav offers numerous pricing plans to suit your needs.
Recessions are a natural part of the business cycles. Companies of all sizes must weather them… or wither. Get the assistance you need to navigate murky waters. Schedule a demo and see firsthand how Jirav can help your business prepare for the next downturn.