There are several paths to stability during recessions or periods of business contraction. An economic downturn is far from the only scenario that can lead to cash flow problems. The introduction of a competitor in your space, changing consumer preferences, supply chain challenges, inflation, and a host of other potential factors can cause businesses to experience reduced cash flow.
How feasible solutions are for a business will vary based on its industry, margins and existing operational approach. However, setting a plan in place now and beginning to build cash reserves for a future rainy day can potentially pay dividends.
One of the most dependable ways to future-proof a business is through revenue diversification. If one product or service becomes obsolete or consumer demand drops sharply due to competing products or changing preferences, your business will have an alternative revenue stream to fall back on.
Netflix started as a DVD rental service but far outlived DVDs by diversifying into a streaming platform.
Amazon started out as an online bookstore but thrived as a marketplace for all kinds of goods. Apple made personal computers that consumers found to be inferior to alternatives but is now one of the most profitable and highly respected device designers and manufacturers.
Although it is possible for businesses to diversify after their original revenue sources have fallen out of fashion, businesses are more likely to survive if they add revenue streams in advance of a downturn.
For businesses with more durable service or product offerings, building cash reserves can be a reliable way to survive during downturns. The COVID-19 pandemic is an example of a scenario in which many sustainable businesses were forced to shutter, permanently in some cases, because of a steep but temporary drop in cash flow. Having a cash reserve to weather unexpected storms may allow some businesses to reach the other side and resume normal operations.
Auditing and eliminating unnecessary costs is always beneficial, but it is especially important during downturns. Hard choices can often prevent worse long-term outcomes. If a service or product offering begins losing money, the employees who provide that service or product may need to be reassigned or terminated. In some cases, vendors can be convinced to reduce per-unit price or change payment schedules to enhance cash flow for struggling service lines.
There are scenarios where a business can retain clients who are tempted to leave by meeting them halfway on things like billing. Providing multiple payment methods or financing options may encourage customers to continue purchasing from you, even during economic downturns or recessions.
On the flip side, businesses with lax credit policies may need to tighten collections when they face financial headwinds. Cracking down on unpaid receivables and late payments can potentially give businesses breathing room by safeguarding their remaining cash flow.
Businesses with loyal customer bases are more likely to maintain revenue during downturns. Although most consumers act solely in their own economic interest, they do sometimes make sacrifices to support businesses in which they are emotionally vested. Building that kind of relationship with customers can potentially allow businesses to weather difficult periods.
Cash flow isn’t solely a measure of revenue generation – cash outflows are equally important. Managing cash flow means not only prioritizing fast and full collection of receivables but also optimizing inventory levels to avoid spending too much on materials or products your business doesn’t need right away and delaying non-essential expenditures wherever possible.
Securing long-term agreements can allow businesses to secure durable revenue that can be relied upon even during difficult economic times. Key clients can sometimes be enticed into entering long-term contracts with incentives, like discounts.
Pursuing efficiency enhancements early can make businesses more adaptable if supply costs increase or sales decrease. Businesses that have already lowered their operating costs through automation or streamlining are less likely to fail during a recession or industry challenges.
During recessions, disasters, pandemics and other unforeseen events, many businesses will be eligible to receive various grants or government relief programs, often in the form of low-interest loans with generous terms. These may be far more advantageous than high-interest lines of credit or business financing.
Operating a business is an inherently uncertain proposition. Even those in resilient markets can be vulnerable to changes in their industry or recessions. If you want to identify ways to enhance the resiliency of your business or improve efficiency to make your operations more sustainable, the team at H&H Accounting Services is here to help. Call us at (480) 561-5805 for a free consultation.
