Best Practices for Managing Your Business Through an Economic Downturn

How To Run A Business During An Economic Downturn

 Best Practices for Managing Your Business Through an Economic Downturn

The United States economy is nothing if not cyclical - which can be a good thing or a bad thing depending on when, exactly, you're trying to operate a business.

 

See Relax Tax’s Debt Guide at relaxtax.com/debt

 

According to one recent study, roughly 57% of small business owners say that they fear the U.S. economy will only get worse over the last year. Many are worried that if something doesn't change, things could get as bad as they were in April 2020. Keep in mind that many of these small business owners are still very much feeling the impact of the onset of the COVID-19 pandemic that took place during that period of time.

But the key difference here is that nobody really saw the Coronavirus - or its long-lasting damage - coming at the time. Indeed, it took virtually everyone by surprise. Now, people have a chance to prepare themselves to hopefully mitigate as much risk from another such event as possible.

 

See this related post from Dennis Harabin: How To Manage Cash Flow To Prepare For The Possible Recession
If you’re a business owner who has been through a recession before, you know that smart cash flow management is absolutely crucial. If you’re a new entrepreneur who hasn’t been through an economic downturn, you may be less familiar with how quickly your finances can be affected. To protect yourself and keep your business operating, here are the things you need to know about adjusting your cash flow process to match the economic environment.

 

Your Business and the Economy: What You Need to Know

By far, the most important step that you can take to help protect and manage your business during an economic downturn involves paying more attention to your cash flow than ever.

Cash flow was always one of the biggest reasons why small businesses prematurely shutter their doors and the risk is even greater during the unpredictability of a downturn.

Therefore, to keep your business as healthy as possible, you need to do whatever it takes to bring in more income than you're spending on expenses each month. This isn't something you're going to be able to do overnight - it's not like flipping a light switch. You need to talk to your financial professional today to see what you can cut, if necessary, to help create a stable foundation from which to work from.

Along the same lines, if yours is a business that keeps an inventory on hand, you'll want to take care to start reviewing your inventory management practices sooner rather than later.

Inventory is one of the biggest overhead costs for every organization and many see it as a "necessary evil." But what they need to understand is that it doesn't need to be nearly as large of a burden as some allow it to become.

 

See this related post from As the Pandemic Continues, Managing Restaurant Cash Flow Becomes Critical
Cash flow has always been a challenge for restaurants, and before COVID-19 changed everything there were thousands of articles written about the importance of forecasting, streamlining overhead, and controlling inventory. But more than a year-and-a-half into the pandemic, more than 110,000 restaurants have closed their doors permanently. Those restaurants that survived (and even thrived) in the face of closures, reduced seating, and staffing shortages went beyond traditional cash flow strategies, finding ways to reduce costs, expand sales, and pivot their entire menu. With reports of variants squashing hopes of a true return to normal, here are some of the cash flow management strategies that have helped other restaurants expand their clientele, pay their bills, and keep their doors open.

 

Gather your team and see what you can do to reduce the amount of inventory you have on-site. Go over your analytics and historical reporting to make sure that you're not producing more products than you're actually selling. Oftentimes reducing the amount of inventory also allows you to reduce your warehousing costs as well because you're no longer paying for products that are just sitting in a warehouse somewhere waiting to be sold.

In the run-up to any economic downturn, it is also important to double down on that which you do better than anyone else. As businesses continue to grow, they often add new products and services in the name of "diversification." If the economy were verifiably strong, that would be a relatively decent time for experimentation. An economic downturn is not that time.

Instead, focus on everything you do best and let the rest fall by the wayside for the time being. Remember that you're not necessarily trying to grow bigger during this period - you're trying to do what you have to in order to survive.

Finally, consider attempting to win over the customers of your competition now before things get particularly tricky in the marketplace. Figure out which of your competitors are most successful and pay attention to what they are doing. Do they have a particularly compelling value proposition? Do they know their audience better than you know yours?

Likewise, are there any gaps that you can identify that are potentially able to be taken advantage of? If you start winning over new customers today, you'll increase the chances that they will be there for you when you truly need them tomorrow.

 

See this related post from What Can Business Budgeting Do To Your Business
One practice to get in the habit of when setting a budget involves listing out three key things: your projected sales for the upcoming year, any fixed expenses that you have such as rent for an office or equipment and things of that nature, and variable expenses. Then, you can contextualize things and begin to get a sense of how much you need to accomplish exactly what you want.

 

In the end, it's simply not possible to avoid an economic downturn altogether. They've happened before and they will certainly happen again. But what you can do is make sure that you're prepared for this inevitability, which is what these best practices are all about.

If you'd like to find out more information about what your small business can do to protect itself in the event of another economic downturn, or if you just have any additional questions that you'd like to go over with someone in a bit more detail, please don't hesitate to contact this office today at 551-249-1040.

Do you need more information? You can reach out to Dennis Harabin at Relax Tax today!

 

 

Recommended Readings: 

 

***
 
Relax Tax is your trusted financial partner. 
We obsess about helping people retain more of what they earn.
We can provide you with a set of solutions for your financial goals no matter your financial situation. If you want to learn more about taxes, obligations, investments, and how to handle them, Click Here to schedule your initial meeting.
Back to blog