Ready for anything, even recession

There’s a lot going on as we continue to recover from the pandemic. We assumed that once the pandemic ended, all would be well. Life would return to normal. Yet we find ourselves grappling with the highest inflation in 50+ years, ongoing supply chain issues, war, and maintaining a quality workforce. Now, given these and the current rise in interest rates, more economists and financials leaders are suggesting we are headed into a recession. How should a small business owner respond? Actually, there is a lot you can do and if a recession doesn’t happen, the strategies below will strengthen your business with the ability to take advantage of market opportunities.

1) Manage your cash flow

2) Revisit your value proposition

3) Maintain good customer relationships

4) Keep marketing

5) Manage your inventory

6) Build, invest and lead your team

Manage your cash flow

For many owners this means “is there cash in the bank?,” while for others, “am I making a profit, can I pay my bills? Some accounting products have a cash flow report available. A cash flow report combines both your P&L and your balance sheet to create a forward-looking report with what is known today.

The keys to managing cash flow are to reduce debt, speed up accounts receivable, have a cash reserve and a solid line of credit in place.

Reducing your debt is critical to cash flow. Now is the time to lock in fixed rates by getting rid of any variable interest loans you may have. Remember, any EIDL loans will likely be required to begin repayment this year.

It’s crucial to actively manage your accounts receivables. Don’t serve as a bank to your customers. Your average ‘days to pay’ should be aligned with the days you’ve arranged to pay your vendors. This becomes particularly crucial if you have longer projects where your outlays during the project are greater than your receipts from your customers.

Always have a 3-6 months cash reserve to cover average overhead expenses. A line of credit may help smooth out your cash flow, especially during longer projects when upfront costs exceed receipts. If you already have one, check to see how much of it you are currently using. Can you pay some of it off, if needed, to make sure there is some cushion just in case a cash infusion is needed?

Revisit your value proposition

Has your target market shifted as your business has grown and developed? Make sure your key target market is being served well with your products and services. Review your product or service lines to be sure they are all profitable and help determine where to put your focus to increase profit.

Focus on Customer Service

Purchases from existing customers are 25-95% more profitable than new customers. Acquisition costs have been paid for and your existing customers are paying your standard rates. Simple ways to connect with your existing customers are through email marketing or social media.

Keep Marketing

It’s critical to retain and increase your best customers via effective marketing. Measure your return on investment for your marketing efforts. Is your marketing reaching your target market at the right time in the right place? Fortunately, with digital marketing it has gotten much easier to measure your ROI for your marketing efforts.

Manage Inventory

Reducing your inventory is key to cash flow and will require more foresight as supply chain issues will likely continue. A good rule of thumb is the 80/20 rule, 20% of your inventory contributes to 80% of your profit. Doing this while also offloading old inventory, even if at a loss, will improve your cash flow over time. Remember, stocking inventory is an investment in your business. Manage it well.

Build, invest, and lead your team.

With low unemployment and high turnover, it’s crucial to be the leader of your organization. Engage your team, making sure they understand the important role they have in your business. This could include using their expertise to analyze your processes to create efficiencies in your business. At this time, it may also include giving them a raise or a bonus to recognize their contribution to the team’s success. Invest in training. Retention saves a lot of time and money. The average cost to replace an employee is 1.5 to 2 times their annual salary.

Working through these items will strengthen your business in good times and difficult times. It is possible to prepare your business in case a recession comes our way so that you can weather it well, not being taken by surprise or just letting it happen.

For additional ideas and counsel, contact North Idaho Small Business Development Center at North Idaho College. Visit https://nisbdc.com or call us at 208-665-5085.

• • •

Deborah Dickerson, PMP, MBA, is a business coach at North Idaho SBDC.