One would think there wouldn’t be a need for recession planning—we should see it coming. The constant sine wave of business cycles makes recessions as inevitable as surging booms. Of course, if you put 10 economists in one room, you’ll get 11 opinions, so the exact timing of recessions is darn near impossible to predict. Still, like hurricanes, recessions come along once in a while, and occasionally one will wreak havoc on the shoreline.
One of the great business models that can teach how to weather recessions is seasonal retail, such as a small business that sells swimming pools and backyard leisure items in the summer. When seasons change its business needs, you can bet the farm that the display changes to snow blowers, wood stoves and chain saws in September, and Christmas trees in December. Recessions come as regularly as seasons, just not as often. Businesses and consumers alike should be prepared for them just as they prepare for winter.
To get started, you first must understand the financial ebb and flow of your business. You should be using a computerized accounting system. Quickbooks is the premier system right now. (If you’re using an old paper system and doing your own bookkeeping, your first task is to change immediately. Buy the software and take a course in using it. They are available online, as well as various classroom settings).
Your primary tools are found in the company financials, sales and customers sections. You will use three primary Quickbooks’ tools:
1. Profit & Loss Statements (P&L). The program will allow you to see all your expenses and income—categorized—and tell you if you’ve made a
profit or suffered a loss during that time period. Run the P&L as far back as you can, five or 10 years if possible. Do it for each quarter and
annually. You will be able to tell what period of time is most profitable, when expenses rise, what the expenses are, when income increases and in which categories.
2. Sales and Representatives. If you have a sales force, the Sales section of Quickbooks shows sales details by individual reps. This will tell you who is doing the best job and who needs improvement.
3. Customers & Receivables. This section of Quickbooks will show you open invoices and accounts receivables aging details. Now you will know how long it takes you to get paid and how many outstanding invoices there are for each period. This is crucial, since the amount of time it takes you to collect has a direct impact on your cash flow.
Once you have this information at your fingertips, you’re ready to begin recession-proofing your business. When you get right down to it, handling recessions—or any kind of business slowdown—consists of three things:
• Cutting expenses much as possible without affecting sales and income. Actually, a wise businessperson should be doing this all the time. Trim only the fat, and beware of cutting things that bring in revenue. Scrutinize the expenses part of your P&L statement. Take steps to reduce obvious expenses that can be lowered. For example, improve energy costs through efficient windows or insulation and eliminate superfluous purchases, inventory and services that aren’t profitable.
• Maintaining sales and income as much as possible in the current environment. Be very careful to differentiate between crucial advertising that brings in business and that which doesn’t. Ask customers how they heard of you. Offer coupons that must be brought in so you know the source of the customer. Record the answers and use it to manage your advertising budget. In addition, use your sales records to rank your reps and assign territories. Know who needs to improve their performance, and help them increase their achievements if you can. Or, cut them, if you must. In a recession, the survival of your business may be at stakes. Examine closely the functions of the other employees. In a recession you may be forced to retain only key employees. Be ready, have the decisions made ahead of time and hope the day never happens.
• Having, and properly using, an emergency fund to help weather the storm. This is crucial. If you do nothing else, at least do this. Start putting 10 percent of gross in a ready, liquid fund tied to your business. Use a good steady bond fund like Vanguard Intermediate-Term Tax Free Municipal Fund, or ING Direct. Make believe this is another expense—an expense that might save your business some day. Keep going until you have at least six months worth of your business’ gross income. In addition, have a ready source of credit in case a deep recession comes along and you need more cash.
Watch your cash flow in good times. There are many dangers of financial complacency, and when economic slowdowns occur a business can be blind-sided. Collections may be abominably slow and expenses high, and it can be a scramble to get rid of bad habits developed during economic booms. Straighten it all out during the good times when you think you don’t need to—because you really, really do need to.
There you have it—a basic, commonsense guide to recession-proofing your business. In reality, doing this will improve every aspect of the business and boost your bottom line. It will feel good when you get this done, and you’ll sail through the next recession with a smile.
By Patrick Astre
About the Author:
Patrick Astre – Certified Financial Planner, Enrolled Agent, Registered Financial Consultant – is an author, speaker and a recognized tax and
financial expert specializing on the economic issues of longevity. As the founder of Astre Planning, Inc, Patrick has been advising individuals, small businesses and corporations for nearly 40 years. Some of his clients include ING Direct, Princess Cruises and Emerald Passport International. He is the author of, “This is Not Your Parents’ Retirement,” as well as “Educated Investing and the Four Seasons of
Money.” For more information, contact Patrick at 1-631-744-9100 or visit www.ProsperousBoomer.com.