8.12.2020

How Businesses Can Mitigate the Financial Risk of a Recession

Written by Angela Kippen

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The U.S. economy is in a medically induced coma. CNBC reports that this recession is unlike previous ones, as it isn't caused by anything related to finance.

Instead, it is caused by a worldwide health crisis, whose only remedy, according to economist Cecilia Rouse, is “to stand down and pause the economy.” In other words, this recession is self-induced, but its impact is unprecedented nonetheless. In fact, it has forced 72,842 businesses across the U.S. to close shop permanently, and another 70,000 or so to close down temporarily.

Unfortunately, the health situation continues to linger, which means business owners are looking at what might be a prolonged economic downturn that is sure to wreck their finances. For this reason, it's imperative to implement measures that can help mitigate the adverse impact of either a recession or a steep economic decline.

Some of these measures are as follows.

Be smart about financial fundamentals

It's crucial to be proactive, and business owners can start by protecting their financial fundamentals. Specifically, business owners need to make sure that they have adequate cash flow and access to capital for continued liquidity, which is vital for making smart investments where possible. This will require constant monitoring of the business' cash position and a reduction (or postponement) in spending.

To do so, business owners can (a) reduce working capital by reducing current assets such as inventory and, (b) manage customer credit risk by minimizing credit-based transactions with high-risk customers.

Optimizing your inventory management can be easily achieved with the latest stock control technology. By gaining a 360 view of your stock, and leveraging historical sales data, it’s possible to minimize cash flow tied up in stock, so you only hold what you need.

Monitor the budget and adjust accordingly

In line with being proactive about their finances, business owners will have to keep an eye on the budget. A guide on preparing for a recession by Marcus notes how tracking a budget religiously helps in identifying essential expenses, in determining areas for saving, and keeping on top of debt repayment (if any). This process of constant monitoring and adjustment, in turn, is critical in a recession, when the goal is to spend less and save more.

For businesses that may be struggling to monitor and stay on budget, hiring a financial advisor is seen as a viable option. Similarly, by integrating your point of sale system with accountancy software, you can quickly develop a holistic view of your company finances, allowing you to easily identify areas for savings.

Leverage existing clients, win new ones

A decline in customers is inevitable in a recession, which is why it's vital for business owners to make the most of their loyal customers. An article on how to thrive during a recession by The Balance details how shifting a business's focus on these customers to keep them happy and satisfied is a way to make a profit even in a down economy.

Remember: a 5% increase in customer retention can result in 25% more profit, while repeat customers are likely to spend 67% more than new ones. That said, business owners can't hold back in trying to win over their rivals' clients. In fact, they ought to make it their goal, and they can do so by offering something not being offered by competitors.

Take advantage of breaks and benefits

It's okay to get some help from time to time, especially in times of crisis. Fortunately for businesses in the U.S., the government is offering it in the form of the CARES Act. Passed in March, the CARES Act offers various programs to prop up small businesses across the country. These include paycheck protection programs, Small Business Administration Bridge Loans, debt relief, and Economic Injury Disaster Loans.

Business owners need to do their due diligence in finding which programs work for their business, as well as work on the necessary paperwork to get approved.

If you’re interested in future-proofing your business with the latest cloud point of sale technology, speak to one of our expert consultants today.

This article was authored by Angela Kippen