Recession 2023: Here is How to Protect Your Business Profit
Updated: 4 days ago
Recessions are inevitable, just a normal part of the economic cycle. How your business prepares for the inevitable is what is important.
During an economic recession it is imperative that a business carefully review its cost-structure with a view on long-term objectives. This may include cutting costs in some areas while investing more heavily in other areas.
So, knowing it is a matter of when, not if, the next downturn will come, how should your business start preparing?
Avoid Broad Cost Cutting
Do not broadly cut costs across your business. It will not work and will negatively impact your future growth.
News headlines hone in on stories of hiring freezes and mass layoffs. Such actions are sometimes warranted, but only if there is going to be a prolonged downturn or a permanent shift in your industry.
Layoffs, hiring freezes, travel freezes, or broadly cutting “x%” of expenses may seem prudent. However, these reactionary actions can be detrimental to the longer-term health of your business.
Broad cost cutting will negatively impact your future growth if customer engagement activities are cut without careful management.
The cost of negatively impacting employee morale with indiscriminate cost-cutting should not be overlooked.
Business restructuring, which includes a significant change in an organization’s cost structure, is warranted in certain circumstances. However, this should not be confused with cost management.
Operating cash-flow needs to be front and center in each planning decision you make when preparing for a downturn.
As a reminder, when assessing cash-flow, you need to look beyond your income statement.
You must look beyond just your current expenses to also consider working capital (inventory, receivables, payables). Managing your operating cash-flow will ensure your business can still service any debt while not putting at risk any capital investment obligations.
Consider the following.
How do you budget for expenses? Do you take prior year actual expenses and add a certain percentage to cover inflation or volume growth?
If this sounds like your businesses approach to budgeting, you are not alone.
Admittedly, I have used this approach myself in the past. However, this approach often leads to a budget containing a lot of 'fluff'. This gives you less visibility into what your true expenses will be.
Under zero-based budgeting, you start from zero as the name implies. Each year, budget holders must justify the need for any expense in their respective budgets.
While initially more time consuming, zero-based budgeting can unearth unnecessary business expenditures and prevent expense creep year-over-year. You will now have more visibility into your true expenses, which will allow you to make targeted expense cuts if necessary.
I have seen businesses cut heavily in certain areas and then redirect some of the cuts to invest more in areas that drive customer engagement.
The business has still reduced its net expenses, yet it has positioned itself to come through the recession in a stronger position.
If the competition cuts customer engagement expenses, you need to be there in their place.
These more strategic approaches to cost cutting are only possible if you have a strong budget to work from. A zero-based approach will help you.
And yes, you can start this now even if you have already completed your budget for 2023.
Engage Your Customers and Suppliers
If you and your team are not fully engaged with your customers and suppliers, it will come back to bite you. Engage today.
Being aware of the financial well-being of your key stakeholders is critically important during times of economic stress. Your customers and your suppliers are intertwined in your supply chain and as such both directly impact your cash position.
If any of your customers are under financial duress, having a stronger relationship may help you jump ahead of other suppliers when the next payment run is processed.
In a period of rising interest rates, offering discounts to incentivize early payment may be worth considering to pull-forward collections. This should only be considered if the discount rate is lower than your own cost of borrowing.
Review your supplier listing and identify any areas where you do not have a verified back-up vendor. If during an economic downturn one of your suppliers goes out of business, you cannot afford to have a hole in your supply chain. This can also give you some leverage in terms of pricing.
After reviewing your supply agreements, be proactive in approaching suppliers where you may have minimum purchase obligations. Now is the time to negotiate if you are at risk of your volumes decreasing. Avoiding a build in inventory is a critical cash management task.
Hopefully your team is already engaged with all of your stakeholders. If this is not the case, start today.
Prioritize - Don't Eliminate - Capital Spending
If you eliminate capital spending you are betting against your future business growth.
With that said, you may need to prioritize projects that are either critical to you core strategy or projects that will drive significant efficiency improvements in the current year.
Any projects that are not critical to your core strategy and will not be net cash positive in the next twelve months should be delayed.
Again, prioritization and careful cash management is the game. Blind cost-cutting is detrimental to your business.
Not Just a Finance Exercise
An economic downturn is a significant event. While it is not something you should panic over, assessing how your business should pivot is not a simple finance exercise.
Each functional area of your business should be involved - at the very least, your senior leadership team. Finance can lead this, but finance should not own this.
If you decide to make significant cuts in one part of your business in order to fund another area, you want to make sure everyone clearly understands the benefit to the business as a whole.
Now, Let's Get Going!
Let's briefly recap what we have discussed:
Economic downturns are part of an ordinary cycle
Panic induced broad cost cutting will harm your business
Through targeted cost cutting, you may invest more in some areas
Engage your customers and suppliers immediately
Prioritize, but don't entirely cut, capital spending
This is a cross-functional exercise
If managed appropriately, you can position your business to be in a stronger position than your competition. A downturn can be an opportunity for you.
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About Colin Murray
Colin is an experienced finance executive with over fifteen years of diversified experiences for companies spanning multiple industry segments and ownership structures. Colin has built a career on transforming finance teams into business partnering organizations with a focus on continuous improvement.
Prior to founding Your Weekly CFO, Colin was the CFO of a private-equity backed manufacturer. Previous roles including heading finance for multi-national business units of public companies.
Colin has bachelors degree in finance from Miami University and an MBA from The University of North Carolina a Chapel Hill.
About Your Weekly CFO
Your Weekly CFO is a boutique CFO Advisory Services Firm specializing in Finance Performance Improvement (FPI). FPI allows clients to extract maximum value from their existing business while increasing projected returns on future business through strategy alignment, and people and resource development