How businesses can protect against an economic downturn
Small businesses face a variety of challenges in today’s uncertain climate. A recession is a real possibility, along with cyber-threats, higher interest rates and new technologies like artificial intelligence. Small businesses may be affected directly or indirectly by an economic downturn.
Prepare business by analyzing the risks and developing strategies to minimize and survive the effects of a recession.
Here are some steps small businesses can take to build a strong financial foundation for a business, with an emphasis on maximizing cash flow and profits.
Definition of an economic downturn
A decline in the rate of growth of gross domestic products (GDP) is an economic downturn. The total value of all products and services is called GDP.
A decline in the following indicators can indicate an economic downturn:
- Explore the services
- industrial production
- Wholesale
- Retail sales
- employment
How economic downturns impact business
Economic downturns tend to occur in cycles. Planning and being prepared will be easier if the economic climate and its impact on an industry or a sector are monitored.
Most business owners will experience economic downturns more than once in their lifetime.
Businesses can survive a recession by taking practical measures.
Cut costs in the right way
In times of economic crisis, cost cutting is usually a priority. Businesses must be careful to ensure that the cost-cutting measures will benefit the company in the future as well as now. Businesses can reduce the amount they spend on client gifts, employee travel or catering for events.
It is important to consider the impact of capital expenditures on the bottom line.
Realistic KPIs
It’s crucial to update KPIs during a recession so they reflect the current reality. In times of prosperity, what worked won’t work in a crisis. Businesses need to be realistic in their expectations.
Unrealistic targets can be demoralizing. Business KPIs can be used as a guide for the team to show what is needed to do to survive a storm.
Team motivation
It is important to focus on retaining existing employees, and motivating them to be productive and engaged.
Business owners should remember that their employees are probably anxious about the future. They can communicate with them regularly, solicit feedback, and take action to make sure they feel part of a group.
Effective performance management and forecasting
In a recession, focusing on reporting and forecasting is critical for both planning and management. For sound decision-making, timely, benchmarked feedback is crucial.
Short-term, it is important to focus on a small number of key performance metrics. These measures must be transparent, clear and easy to understand. KPIs that focus on cash generation should be communicated formally and managers should understand them.
Encouragement, such as incentivizing, can be used to encourage people to follow through.
Consider e-commerce carefully
Many businesses generate extra income through online business. Startups and growing businesses should be cautious when approaching this area.
Not all small businesses adapt well to ecommerce. Businesses should not stray too far from their core competencies, without carefully implementing risk management frameworks.
The right insurance
There are many options to help businesses maintain coverage.
Paying premiums in monthly installments rather than a lump-sum upfront can help to smooth cash flow. Businesses can also borrow money to pay for premiums through funding.
Good insurance platforms or brokers will work together in order to find a solution to any downturn. This ensures that businesses are protected and can build a resilient, future-proof business.
An insurtech, BizInsure can help sole proprietors and small businesses compare quotes and purchase coverage online.
Adapting to a recession
The economic downturn can be a great opportunity for business growth.
During difficult economic times, customers may seek ways to save. In order to survive a recession, it is important to assess the performance of a business.
Businesses must also adapt their strategy to changing conditions. They should assess whether this new strategy will have implications for other areas, such as supply chain, production capability, or financing requirements.
Preparing for currency challenges
A downturn is often accompanied by currency fluctuations. Currency fluctuations can be a double edged sword for businesses. If a business sells imported goods, then it will pay more. Businesses will need to either reduce profit margin, or convince consumers who are nervous to pay more for the goods sold.
Hedging can help to reduce the risks of currency fluctuations. It is a way to lock in a specific exchange rate, regardless of the current rate. There are a number of ways, but it’s easiest to ask a banker to arrange the exchange rate.
ADVT.
