How to Recession Proof Your Finances
Many companies operate in industries that are essentially recession proof. Unfortunately, though, that’s not true for any company. There are, however, ways to ensure your business survives an economic downturn and your personal finances are protected throughout the darker days. In this article, we examine how to recession proof your finances.
The idea of a recession can be daunting, and a bit confusing, to business owners. Essentially, a recession is when a serious economic contraction happens, business activity falls quickly, and the overall U.S. GDP falls. In most cases, a recession technically occurs when economists see two consecutive quarters of GDP contraction. Throughout its history, the U.S. has experienced a number of recessions. One of the worst was the Great Depression when the GDP fell by more than 26.7%. It lasted from 1929 to 1933. When the Dotcom bubble burst in late 2000, only .3% of GDP was lost. It lasted just eight months.
While recessions change in severity and length, they create problems for businesses in a few different ways. First, they affect the revenue a business might see. Customers may disappear or start buying less. Costs, then, get far too high for the company, as it’s tough for a business operating at maximum capacity to make sudden changes. This can lead to a change in supply chains, further affecting business. In turn, the financial health of a company begins to suffer as debt costs rise and capital typically begins to disappear.
Protecting Your Business – Recession Proofing Your Finances Within Your Company
What can you do to protect your business in the event of a recession? Want to know how to recession proof your finances? It starts with planning well before the recession happens. Defensive planning often means drastic cuts to what you do every day that can truly alter your business forever. Better planning, though, means making your business resistant to the shocks that might come from the market, and that can make your company more flexible as a whole.
Horizontal integration is one way to help recession proof your finances, and your company as a whole. This will allow you to build a diversified portfolio you can offer to customers, and that can help soften any problems that might come as a result of a recession. When you make investments in different areas, you broaden your horizons so you spread your overall risk.
Scalability can help too. The best companies can quickly change production in the event the market itself begins to shift. Whether you’re talking about your fixed asset capital or your human resources, the companies that survive recessions have strategies that can be deployed no matter what the economy. Maybe you have employees who could be moved elsewhere should something change. Perhaps you have assets that could be recategorized. This cross-functionality may mean you can move forward no matter what happens.
You’ll also want to create loyalty among your customers. If you’re providing something that is absolutely key to individuals – whether it’s truly a necessity or a simple luxury – you’ll have a loyal following. People believe they can’t live without what you have to offer, even in a recession. Loyalty schemes can help create this, but in most cases, you’ll want to ensure a solid experience is at the core of everything you do and you continually offer benefits customers truly care about.
More than anything else, you’ll want to be sure your finances are in order. You want a range of capital on hand so you have the flexibility you need to make changes to your company. What’s more, though, is that the cash you have on hand is a great way to capitalize on the opportunities that present themselves post-recession. Big names do this all of the time. Amazon, for example, went on a bit of a spending spree after the 2007 recession, buying up Zappos and Audible among others to expand their market share. That could be your company as well. During a recession, assets get very cheap, and if you have the ability to acquire them, you’ll expand your business just as things are beginning to brighten.
Don’t Stop With Your Business Finances – How to Recession Proof YOUR Finances
Your company’s finances are just one part of the picture, though. Your personal finances matter in this equation too. When emergencies hit, you don’t want to have to worry about your personal position as well as that of your business.
You can start by paying down high-interest debt, like that associated with a credit card. Most credit card rates hover around 16% at their lowest. Carrying any balance from month to month actually costs you hundreds of dollars. Eliminating that debt may mean added breathing room.
You’ll also want to work on building up your emergency fund. Try to keep enough cash on hand to cover six months of expenses. Remember that regular additions help to build savings, even if they’re small.
If you feel like things are tight, look at your budget and decide where you can cut small expenses. No more than 30% of your income should be spent on discretionary items. You have to pay for your rent and your food, but you could cut out the morning Starbucks habit or even the Uber to work in favor of taking public transportation.
Throughout, you’ll want to avoid those sudden reactions that push you to change your overall investment strategy. In most cases, the storm will end before big changes in your life – like retirement – actually happen, so don’t make changes that jeopardize your financial security.
Remember above all that patience always pays off during a recession. Thinking long term means the ability to withstand almost any market. If you think a business health check would help your company withstand any oncoming storm, give us a call today.