cash flow in recession

5 Ideas to Protect Your Business Cash Flow in a Recession

October 26, 2022

The signs of a recession are already here. Central banks around the world are increasing interest rates as an attempt to combat rising inflation. Cost of living and the cost of goods are climbing. Even the most established and notable e-commerce and tech companies are scaling back despite their well-known success during the COVID-19 pandemic. No one will be exempted from the impact of the incoming recession.

The World Bank predicts that a global recession will happen in full force in one to two years time. Hence, companies need to start minding the most important part of their whole business; managing cash flow. In a recession, businesses must conserve cash to brave through the challenges of an economic downturn. 

History has taught us valuable lessons for managing cash flow during a recession. Here, we share five actionable ideas to protect your cash flows. 

1.Understand Your Company’s Financial Performance

As a business owner or part of the C-level executive, it is imperative to understand the company’s financial statements. This includes the Profit & Loss Statement, Balance Sheet and most importantly, the Cash Flow Statement. By doing so, it would allow for an in-depth understanding of the company’s debts, cash in bank, assets, the cost structure and more. 

A detailed understanding would allow for better planning in terms of expenses and to factor in the risk relating to a recession. It would also ensure the company has enough liquidity to continue operating and do business as usual. Having a properly planned budget would allow a company to have an idea of the outflow of money and help identify the best course of action for the year. 

2. Diversify Your Products & Services 

In a recession, some industries are impacted greater than others. Industries such as technology, healthcare, and consumer staples are regarded as “recession-proof” since they are deemed essential in any point of the economic life cycle. As such, companies can explore whether it will be a good idea to adapt and diversify to new products and services according to current demands. For example, companies could start digitalising their offers by selling through online channels or introducing new online services.

3. Seek Alternative Funding

In general, companies have two broad categories for fundraising; debt and equity. Debt financing or debt raising is when a company borrows money and agrees to pay it back later with interest. Equity financing is when a company raises capital by selling shares of the company with a promise of dividends when profitable. In a recession, share prices of companies tend to drop and interest rates tend to hike. 

Companies would be wise to stock up on cash by raising funds in the external market, i.e. in the capital market. This can be done when the share offer price is at a sufficiently high level. This would ensure financial sustainability of the company should the recession impact the sales.

4. Restructure & Optimise Costs

In a recession, most companies will be keeping a close eye on their cost structure. The company’s yearly budget has to be reviewed and adjusted accordingly so as to identify any shortfalls in spending. This will make it easier to reduce operating costs. 

You should also take current market conditions into account when adjusting and restructuring the budget. It would be prudent to delay or eliminate any unnecessary spending or investments until the recession runs its course. Thus, take this time to perform in-depth cost analyses to determine the categories of cost that can be reduced, delayed or eliminated. 

In short, an accurate cost structure would allow companies to optimise and pivot their cost levels accordingly.

5. Create a Recession-Proof Business Plan

A recession-proof business plan is defined as a business plan that is specifically tailored to weather the storm of a recession. The value of cash flow is ever more important in a recession and in some ways, more crucial at the profit & loss position of a company. One way to keep cash coming in is to keep in touch with loyal customers to ensure they have your support and likewise. 

A recession-proof business plan also means finding new revenue streams, restructuring costs, and all the points aforementioned. All of these efforts will hopefully fortify the foundation of your business as it brave the recession. 

Read more: Helpful Ways to be Timely & Accurate with Your Accounting 

Conclusion

A recession is only natural as part of the economic cycle. When it happens though, companies of any size will need to rethink and adapt their cash flow management to focus only on the essentials. Normally in an economic slowdown, companies take the time to re-strategise for growth in the next cycle. When things are finally starting to look up, these prudent businesses would just need to execute their plan to win back the market or even take advantage of acquiring distressed companies of good value with their strong cash reserves.

One way to restructure cost and build a recession-adapted business plan is by outsourcing selected tasks like accounting or payroll. Talk to our specialists at Ledgen to explore the best outsourcing solution that can best help your business in these times.   

Contact Ledgen today to get started in navigating through a recession.

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