Managing Your Business during Recession

Only the smartest business can survive the rave of recession. The recession is more or less a common thing, especially in a place like Australia, where recession occurs almost every seven to nine years. In the last occurrence, up to 75,000 businesses were negatively affected, leading to their complete wipeout.  Some of the possible things occurring and as a result of the recession are decreased in consumer confidence, increase in fuel prices and increase in interest rate.

It is very important for a business owner to know the difference between optimism and pessimism.  They should also set realistic expectations without forsaking growth processes.  The recession should be seen as a time to stabilize the businesses further, making it an opportunity, rather than a problem; only a smart business owner will see it this way. Recession helps to bring out both the strength and weakness of business, unlike in good times when the weaknesses can be well hidden.  The recession also exposes bad financial management that might have beset the business during an economic boom. You can employ the service of an accountant to help identify the possible weaknesses in your business and chart a course of profitability for the business.  Many of these professional accountants make use of reliable forensic tools that can detect any early warning sign of weakness and also proffer helpful solutions.

There is no assurance that the actions you take will save your business from the recession, but they can help out a great deal. Check the strategies described below.

  1. Improve finical record quality

A business owner may find it easy to ignore the quality of financial records in boom time, making them turn blind eyes to financial management irregularities.  This can lead to a great problem if the issue is not tackled until recession sets in.

Your business should get very good accounting records and make sure the records are accurate and up to date; this will help you to make informed financial decisions about your business.  If the accounting record is well managed, it should provide the following information:

  • Work in progress
  • Sales pipeline
  • Cash at bank and on hand
  • Debtors & creditors
  • Sales
  • Other KPI’s
  1. Plan ahead

Aside from considering the historical data of your business, you also need to consider the future of the business.  The decisions you make today about your business will have an impact on it the future. You need to prepare an annual budget and plan so as not to bring about the financial crippling of your business. Do not allow the boom to make you complacent.  Make sure you make realistic plans also. Furthermore, make cash flow budget; it will help you in various aspects of the business, like

  • Provision of your lenders with information about loan serviceability and other important financial information
  • Scheduling of important capital expenditure
  • Planning your taxation payments
  • Identification of fluctuation that can culminate to potential shortage of cash
  • Forecasting of possible cash position monthly.
  1. Unlock the various sources of cash that are hidden in the business

The cash flow statement of your business will go a long way to determine if an economic recession can have a negative impact on the business.  Unlocking hidden cash can help keep the business afloat of economic difficulties. Some of the various sources of hidden cash are:

  • Debtors: Proper monitoring of your customers that refuse to pay on time is very important
  • Suppliers: Paying your suppliers too quickly may drain cash from the business
  • Alternative sources of suppliers may be cheaper than the current source
  • Check your work in progress to ensure there is no labor issue, slow accessory or parts delivery and the likes.
  • Modify your stock purchasing so that unused stock will not tie cash down.

How to turn your stock into working capital

  • Know your average necessary stock
  • Make sure of a computerized stock management program
  • Know your necessary maximum/minimum stock levels
  • Buy stock only when needed
  • Know and manage your sales cycle
  • Put together a purchase ordering system
  • Dispose of or sell any obsolete stock
  • Know and shorten your average stock days if possible.

You may not like to sell your obsolete stock at a lower rate, but it is better to get a little cash on them than not get anything at all.