Is another recession imminent? Prepare your business today, so it will survive, and even thrive, should a recession hit.
07, 2014 The Great Recession seems like only
yesterday. Yet it was five years ago that trillions of dollars of
consumer wealth and millions of jobs were lost. Both sales and cash flow
for small-business owners seemed to dry up overnight. It was the worst
economic crash since the 1930s. Could it happen again?
The Bureau of Economic Analysis recently released its final estimate of GDP for the first quarter of 2014. It shows a decline of the U.S. economy
at an annual rate of 2.9 percent. That’s down from the fourth quarter
of 2013, when GDP grew at 2.6 percent. This makes the first quarter of
2014 the worst quarter since the first quarter of 2009 during the Great
While economists blame the results on the severe weather, could we be headed for another recession? By definition, a recession is two negative GDP growth quarters in a row, and historically, they have come at least once every decade.
Whether the next recession is around the corner or years away, we
remember the damage the last one did. How can you prepare and protect
your business should another recession hit?
1. Focus on profitability, not growth.
Companies need to invest in order to grow their business, but they
should only grow profitably. Sacrificing profitability for growth may
get a company in trouble with large losses, especially if expected
sales lag behind the forecast. Don’t let invested expenses get too far
ahead of sales.
2. Stockpile cash.
The single reason that all companies go out of business is because
they run out of cash. A sign I always hang in my office as a reminder
is “It’s Cash Flow, Stupid.”
Forget about the sales line on the profit-and-loss statement and
instead examine the cash flow statement. Do you have more or less cash
at the end of the month? A simple check of your bank statement will give
you the answer. Focus on getting paid from customers, extending
payments to vendors, keeping stock levels low and inventory turns as
high as possible.
3. Draw on the bank credit line.
Banks want to give credit to companies that actually use it. Unless
your business has six months' worth of cash in the bank, draw on that
credit line. The cost of this insurance will be worth the low interest
4. Challenge all business assumptions.
Always ask if the business can be done another way. Cockroaches thrive
during bad times because they know how to adapt or die. How can the
company increase its gross margin? How can it sell to clients at a
lower cost? What parts of the business always make a profit, and how
can you leverage it? Which are the really profitable customers?
5. Ask customers to substitute your products for higher priced ones.
Is your product now the cheap alternative? In a recession, price can
trump all. But why wait until then? Find out from customers if your
products can replace something similar that they’re paying a lot more
for—often it can.
6. Cut costs now even if revenue hasn’t gone down.
No owner has ever regretted cutting costs too soon. When deciding
which costs to cut, use the “cringe factor.” Ask yourself which checks
make you cringe when you write them at the end of the month. Cringing
means that you are not getting value out of these expenses and need to
either cut them or find another vendor that offers those services.
7. Remember resiliency.
Economic cycles come and go. You have been here before and survived.
Cheer the good times with parties, awards and trophies. Mourn the bad
times for 24 hours, but then let it go. If you place value on action,
you’ll have more chances at success.
It's not a matter of if a recession will hit, it's more of a question of when. Get your business ready today, and you can sleep better knowing you are prepared.
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