The boom and bust cycle of the economy means that all businesses go through tough economic times. After a period of expansion comes the inevitable decline. But retail businesses are usually the first to go during a recession. In the last year alone, the American economy contracted by as much as 9 percent, and a record 20.5 million jobs were lost. Even a well-run business can fold if the conditions are bad enough.
Every business owner knows the importance of financial planning, but few understand what it takes to survive an economic crisis. You will need to make difficult decisions to survive. Some of those decisions will negatively affect some people. But if you don’t act decisively, your entire business could collapse. If you’re fortunate enough, a finance-consulting firm can help you prepare for future financial emergencies.
You need to act decisively at the first sign of trouble to stave off collapse. Don’t wait until you run out of options. Here are a few things you can do to improve your business resilience.
1. Don’t be afraid to change the budget
When your business’s survival is at risk, you may need to make difficult and unpopular decisions. In many cases, survival is a numbers game. Many of us prepare the operating budget based on income projections for the coming year. Make adjustments to your budget as you see fit if the numbers fall short of your target.
This also applies to your headcount. We hire employees based on current and future needs. During periods of economic contraction, you may need to scale back your operations to keep yourself afloat. You can reduce expenses and move money to areas where it is needed. If the changes aren’t enough, you may have to let go of some of your employees.
2. Eliminate unnecessary expenditure
Expenditures that make sense during periods of growth may no longer be tenable during an economic crisis. Some expenditures are necessary for your business’s day-to-day operation, such as rent, utilities, and labor. But you can only downsize so far without drastically affecting your business. Focus on reducing business expenditure, such as client dinners, travel costs, and capital outlay.
It’s important to get your expenses down to manageable levels, especially during a protracted financial crisis. You save more money down the line if you implement cost-cutting measures early on. Just make sure your expense reduction doesn’t affect revenue generation.
3. Be transparent
You’re not the only business that is struggling to pay its employees or vendors. Every bank understands the effects of a financial crisis on everyday people. It’s important to maintain open lines of communication with your stakeholders, including your employees, vendors, and creditors. Let them know about your situation early on. Some of them may be able to help you through this crisis.
For instance, if you have outstanding loans, you might be able to temporarily freeze payments or renegotiate more favorable terms. You can also request lower or suspended fees from your bank. If you have an especially good relationship with them, they might even lower the interest until the situation improves.
4. Revisit your business plan
The effectiveness of your emergency measures depends on the length and severity of the crisis. Your business could go under through no fault of your own. Maybe the financial emergency dragged on too long, and you don’t have enough resources to sustain operations. You’ve done everything you can, exhausted every option, but your efforts still aren’t enough.
Instead of writing this off as a failure, you can take this opportunity to change the way you run your business. You can rebuild your business into a nimbler, more efficient operation. Since you’re starting from scratch, you can shed extra weight and refocus your attention.
5. Start an emergency fund
A good business owner can anticipate and prepare for boom and bust cycles. You can’t expect your business to grow forever, and you need to prepare for the inevitable downturns. But an economic contraction can quickly turn into a protracted recession or even a depression. Access to emergency funds allows you some breathing room if you run into problems.
It pays to have easy access to liquidity if your cash flow dries up. Invest some of your profits in recession-resistant stocks and instruments. You also might want to set some money aside in an account.
The bottom line
A good entrepreneur knows how to steer their business through rough waters. If you prepare early on and act fast enough, you can save your business from bankruptcy.