Economic downturns are inevitable. The economy ebbs and flows, and sometimes things just aren't going to go as smoothly as they once did. The most resilient businesses recognize this fact and prepare when a downturn arrives. Following are four tips to keep in mind to make your business more resilient.
1. Build a Financial Cushion
It is critical to have a financial cushion to make your business more resilient during any period, but especially in a downturn. Good cash flow management, which is important, becomes essential during such times. Many businesses fail not because they have a weak product or because their customers leave, but because they don't have the liquidity needed to weather temporary drops in revenue.
Initiate disciplined cash forecasting by creating or refining your twelve-month rolling cash flow forecast and updating it each month. Track incoming payments, fixed expenses, variable expenses, and planned investments. Learn to anticipate when cash dips may occur, and plan accordingly.
Aim for a three-to-six-month cash reserve if possible. Building it may take time, but allocating a percentage of profits each month to a dedicated reserve account can add up faster than you think. Cut non-essential expenses or reevaluate subscriptions that don't provide strong ROI to save for your reserve. You can also negotiate terms with suppliers, shorten payment terms with customers, and improve invoicing procedures to optimize cash flow.
When revenue slows, a cash buffer can provide flexibility, allowing you to keep staff employed, continue marketing, and avoid decisions that could harm your business in the long term.
2. Diversify
Diversify your revenue streams as much as possible. Having too few customers or being dependent on a narrow product line can make your business more vulnerable during a downturn. Look for complementary services or products to offer, explore new customer segments, or consider creating recurring revenue opportunities. Diversification spreads risk so if one stream shrinks, others can help balance the impact and improve stability.
Diversification doesn't have to end with revenue streams to be helpful, however.
"Diversification generates diverse growth options and the resources to fund them," says Donald Sull and Charles Sull at MIT Sloan Management Review.* "Diversification of business units, regions, customers, technologies, and markets provides a greater variety of options for potential growth. These growth options are more valuable in volatile markets, because turbulence increases the odds that events will unfold in a way that allows some of the options to pay off. Diversified cash flows also provide the internally generated resources to fund growth opportunities when external funding is hard to come by. Investors, who
typically value diversified companies at a discount relative to more focused
businesses, recognize the value of diversification during recessions. In a
downturn, investors will pay a premium for diversified companies."
3. Maintain Strong Relationships
Maintain strong relationships with customers, employees, suppliers, and other business contacts. You may find it easier to navigate a downturn when the people around your business trust you. Having these relationships intact can generate loyalty and provide support when economic pressures increase.
Maintain customer relationships by staying present, helpful, and consistent as you strive to meet their needs. Support them by offering discounts or providing added value. Communicate via newsletters, social media content, and personal outreach. When they have problems, address them compassionately.
Nurture employee relationships through communication, skills development, and recognition. Strive to maintain morale and productivity and ease anxieties they might be feeling. Retain skilled staff when possible and foster a positive company culture that employees want to be part of.
Strengthening relationships with suppliers can help result in better terms, extended credit, and priority during supply shortages. Reach out before things get tough rather than waiting until they do. Treat suppliers as strategic partners.
4. Strengthen Operations and Marketing Ahead of Time
Just as you should maintain strong relationships before a downturn occurs, you should do the same with your operations and marketing efforts. If you can improve efficiency and increase brand recognition while things are stable, it will help you weather the storm when they are less so.
"In uncertain times, inefficiency has to go," says Makena Finger Zannini at Entrepreneur.** "Disorganized operations mean missed invoices, wasted
hours or opportunities slipping through the cracks. Solid systems let you do
more with less and reduce risk when resources tighten. At the same time, the
instinct in a downturn is often to slash marketing spending. This may be the
right move if you need the extra breathing room in your profit, but make sure
you’re again focusing on efficiency, doubling down on your highest ROI channels. Take some time to review your operations and marketing and cut fat until you’re operating highly efficiently, even if that is less growth-oriented
or with less new experimentation than you’ve run in the past."
Economic downturns may be inevitable, but the failure of your business is not. Prepare early by building financial buffers, diversifying revenue, optimizing operations, and nurturing important relationships. If you need financial assistance, check out Nevada State Bank's business financing offerings here.
* https://sloanreview.mit.edu/article/preparing-your-company-for-the-next-recession/
