Creating a successful financial strategy during an economic recession is a challenge. But it’s not the death sentence many analysts may make it out to be. Many businesses face the temptation to panic during tough economic times, causing them to make unprompted cuts in the wrong areas and worsening an already tenuous situation.
It might be necessary to make budget cuts during times of a recession. But you might not have to employ this technique if you look for innovation. More importantly, if cuts are necessary, instituting the right budget cuts can be the difference between life and death for companies facing the worst effects of the recession.
Having a team of trusted financial professionals will help you identify these opportunities. The team of controllers and strategic CFO services at Fully Accountable can ensure you’re prepared to face any economic downturn. Continue reading to learn more about how having the right team of financial specialists can recession proof your business.
Understanding Recession Psychology
Leading into a recession, consumer spending and capital both dwindle. These developments often lead businesses to cut costs. It’s important to understand that many businesses panic and cut costs in a flurry, lacking oversight and causing unnecessary damage. Recession survival might require you to reduce costs during an economic downturn, but you need to do so strategically.
Businesses might also be tempted to raise prices as a knee-jerk reaction to faltering economic conditions. The critical point for businesses to recognize is that it’s not necessarily how much you cut, but rather, where you make budget cuts and how you modify your capital allocation. Businesses will feel the effects of a recession differently depending on your industry. Leaders need fractionalized professionals on their team, such as a strategic CFO, to guide them through the recession.
When companies see dwindling sales, they experience temptation to cut products, reduce their expansion, and minimize benefits. Once lagging sales no longer cover production costs, businesses look for potential wiggle room. When they don’t have the capital to pay employees, they might feel like they can’t expand operations. Lower employee morale can also kill productivity. Frequent layoffs and workers expected to produce more with lesser incentive can lead to a dangerous company culture.
It’s important to understand consumers’ behavior should be the critical determinant of your financial strategy during a recession or market downturn. Financial strategists typically separate market demographics into the traditional segments, such as age and income levels. However, during an economic downturn, these segments are less relevant and emotional reactions within the industry play an increased role in consumer behavior.
- Assessment
To assess where your business fits in the recession, data analytics is your best resource. Data lets you make informed decisions and it’s critical to understanding how the metrics affect your daily operations. Your financial team of experts should be inputting data targeting product inefficiencies, talent gaps, and the resources you need to maintain or exceed the current output.
- Prioritizing Cash Flow
To clarify your business objectives and modify your expenses, you should closely examine your cash flow. Positive cash flow is at the foundation of whether you can keep your company operating throughout a recession. Even if your business appears profitable on paper, to keep a positive cash flow, you must issue invoices and recoup unpaid invoices. Frequently check your expenses in check and you can delay payments until they are absolutely necessary.
- Focus on Your Core Competencies and Current Customers
By diversifying your revenue stream too much you might abandon your core customers. Doing so can stretch your budget too thin and winds up placing unnecessary risks on your shoulders. Focus on your current customers and how your core competencies have allowed your business to succeed. You customers have proved their loyalty and they’re less likely to leave than new customers during a recession. As long as you continue your improved services, they should remain loyal.
- Overtake Your Competition While They Are Vulnerable
The stakes are higher with your competition during an economic downturn. Every customer becomes that much more important and you can’t afford to lose. However, your competition faces obstacles and threats just like you.
This can be the perfect opportunity to overtake them with a concrete strategy. Differentiate your brand during times of economic downturn and prove to your customers why you’re better. Perhaps you lower your prices in areas that can afford it while they raise them? You can improve your customer service offerings while they are slashing budgets. Whatever way you can stand out improves the likelihood of success.
- Maximize Your Talent
In the midst of an economic downturn, your resources will be strained. This includes human capital. In these cases, you need to maximize the teams you have in place. Some possibilities to improve your current talent include: identifying natural leaders in your organization and calling them to lead and providing more incentive to those that could increase your ROI. Tracking with metrics to recognize your core competencies is an easy way to identify natural leaders within your organization. Understand who is on your team and how to get the most out of them.
You can also look outside your organization. Because other companies are looking to cut costs, they might not recognize talent, causing valuable players to seek more stable employment options.
- Recession-Proof Your Business
Business owners who understand the natural progressions of recessions can adequately prepare for them. The business that plans for all possible outcomes will be prepared when struggles occur. Long-term strategy: Having a strategic CFO create long-term initiatives is the easiest way to maximize your business plan. You should be able to give the leaders within your organization tools for training, productivity, and communication.
- Innovation
Investing in the latest technology can streamline many of the processes hindering your current business model. By incorporating new technology, such as AI, machine learning, and data analytics, you can cut costs while increasing productivity. The scalability these tools give you is valuable to have in your repertoire while dealing with economic downturns.
- Intelligent Cuts
Making cuts is often inevitable during a recession but what separates a failing business from a successful is making the correct cuts. Many teams start by cutting their sales or marketing budgets without looking into other areas first. Businesses can look to the following areas to make budget cuts before their sales and marketing departments:
Inventory
Inventory is an easy place to look for budget cuts. You need to connect how much product you’re selling with changing demand. Try to reduce what you’re holding in inventory and produce more accurate estimates of your incoming and outgoing product.
Office Location Expenses
How much of your office space remains underutilized? Can you move to a smaller space or a cheaper location to reduce expenses? Can you possibly move to a remote work environment? Analyzing your location expenses can help you cut overhead costs and open up capital.
Waste
It might surprise you to find out that many of your expenses are useless. Anything that doesn’t actively bring value to your organization should get the ax.
Bottom Line
Too many businesses want to bury their head in the sand when the economic state of affairs takes a turn for the worse. Creating a financial strategy during a recession doesn’t have to be stressful. The financial professionals at Fully Accountable can recession-proof your business by identifying the easiest areas to cut, the most advanced technologies available, and how to outperform your competition.
Contact us today to learn more about how our strategic CFO services can help your business maintain success even during times of economic distress.
Fully Accountable is an outsourced accounting and fractional CFO firm that specializes in ecommerce accounting for online businesses. As a Inc 5000 fastest growing companies award winner, our diverse team of accountants, bookkeepers and CFOs can help you improve your cashflow and effectively manage and grow your bottom line.
