The blowback from the coronavirus and now the ongoing war between Russia-Ukraine triggered a global economic slump in 2022. Young entrepreneurs, especially those who are running new ventures, are finding it difficult to hit sales targets and invest in new products. No wonder, a lot of them are looking for ways to make their business recession-proof.
Since independence, India has come across five recession periods. While it is also true that recessions are hard to forecast with accuracy, it’s possible to keep the business afloat and possibly even thrive through the economic crisis. But the question is how?
Maanoj Shah – Director of Growth, Strategy, and Alliance at Finsmart Accounting – recently shared insights to help young startups become recession-proof. Shared during a conference, these ideas have helped startups active in diverse industries during recent slumps and could probably help you as well.
Are you ready to go through tips and ideas to make your business recession-proof? Let’s go!
#1 Make Cash the King
Jack Welch once said, “Cash is king. Get every drop of cash you can get and hold onto it.” Turns out, the key to surviving a recession is to build up your emergency cash reserves. That way, you can keep your head above water while procuring supplies, retaining employees, and maintaining business tools and equipment in the sea of economic crisis.
Reserve at least 18-24 months of expenses in cash. Evaluate all business expenses and mow down the ones that aren’t helping your startup to make money. Relook your strategy if your business is showing signs of slowdown during the recession. Right size your overheads to ensure you have a healthy cashflow reserve to ride over this 18-24 months,
#2 Stay Bottomline Focused
When going is good and the economy is booming one can go after the top line but it’s good to always stay bottom line focussed especially in slow or recession times. Relook at all your products SKUs and service offering to make sure “ALL” are generating positive returns adding to the bottom line. Don’t hesitate to slow down or discountine certain product line if its adversely affecting and not adding to the bottom line.
#3 Look at Unit Costing
The best way to look at your Product P & L is by drilling down into every aspect of unit cost. Look for opportunities for savings or renegotiating with vendors on each line item of the Product or Service P & L. If you cannot afford to run all the product lines the best way is to look at the unit economics and decide which one isn’t giving the benchmark returns based on that you can strategize your business plan.
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#4 Run a No-frill Business for a Couple of Years
While some recessions last a year or two, others can drag on for long periods. Hence, the next Finsmart advice for entrepreneurs is to run no-frill startup businesses for a couple of years till the market picks up again.
It will be good to look at every feature of your product and service and identify any frills that can be removed without impacting the customers. Further look at your overheads, general and staff welfare to see if there are any opportunities to downsize or reduce the expenses on that. Remember every buck counts so look at even the smallest opportunities of savings together it can become a sizable one.
#5 Don’t Delay Decisions
A wrong decision isn’t forever; it can always be reversed. However, the losses from a delayed decision are forever. A lot of times, young entrepreneurs take a lot of time to implement hard decisions. This can turn out to be a real issue during a recession.
Don’t delay your business decisions be it cutting down cost or trimming down people size or removing certain frills, Identify the potential of an opportunity and take account of possible outcomes. Remove emotions and focus on the single dimension to keep your startup afloat till the recession curve tapers off.
#6 Don’t Hesitate to Right-Size, Down-Size, or Pause Few Product Lines
Its extremely critical decision when it comes to discontinuing a product line or downsizing people or infrastructure. But in times of recession dont think that is a permanent decision, all these are temporary decisions to ensure your start-up floats and if you survive then you can thrive.
So, don’t hesitate to downsize your office or any other infrastructure for preserving cash. Take care of short-term cash flow first. It will allow you to learn how much money needs to move out of your business, at what time it should be paid, and whether your forecasted income will cover the ongoing expenses.
#7 Communicate More Often
Experienced entrepreneurs know the importance of communication but it becomes more mission-critical in the midst of an economic crisis. A few people in your staff may feel insecure and will be looking for reassurance through the recession storm. That’s why maintaining healthy communication is important.
Have frequent and honest talks with them – not only about intended business changes but also about the importance of wellness during times of stress. Also, explain the cash effect of every harsh business decision made. That way, you will be able to make certain that employees are aware of the reasoning behind business decisions.
#8 Ensure Your Finance Team Gives Right Numbers and Forecasts Week to Week
Cutting down your expenses isn’t enough. You also need to understand where your business stands financially. Keep a sharp eye on numbers. Ask your finance team to give you complete clarity on cash flow on every decision you make along with numbers of profit margins, inventory, and monthly sales.
Tell the finance team to give you a weekly or monthly financial report. Review numbers involved with the report thoroughly and have a detailed discussion with the management on each P & L product. Reviewing your cash flow frequently will make sure that short and long-term financial goals are not missed during the recession.
#9 Keep Your Debt to Minimum
While you continue to build cash reserves for your business, it is also essential to make at least the minimum payments on your debts during a recession. Why do you ask? Because this recession-proof business idea can help you prevent late fees and potential damage to your credit scores.
Consider these tips for keeping your debt to a minimum:
- Don’t take extra debt if you don’t need it, as it will have an interest outgo.
- Prevent huge detrimental impacts on cash flow by re-looking into customer funding models.
- Renegotiate with your clients for early payment terms to secure your working capital and prepare for a recession.
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#10 Re-visit Your Investment Plan
Our guide to making a business recession-proof will be considered incomplete without this tip. It is important to have an investment plan in place but it is even more important to revisit it regularly. Circumstances change rapidly during an economic crisis. Hence, adapting your plan to match a change in financial situation will help your business stay afloat.
Become cognizant of the current market scenario and evaluate the necessity. Understand your customers’ needs by asking questions related to product preferences. Also, delay the plan of investing your money into any new product or service until the economy recovers from the recession.
Recession-proof Business: Final Words
As we said earlier, recessions are inevitable. However, startups can come through with minimal damage by planning ahead. With that said, our guide to making your business recession-proof ends. We are certain that the above steps will prepare your startup better to survive any economic climate.
Got any queries to ask? Send them to email@example.com and have them answered by our team of finance experts.
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Director Growth Strategy & Alliance at Finsmart Accounting
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Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.