You’ve successfully managed through the disruptions of the COVID-19 pandemic, but is a recession the next shoe to drop? There’s a growing number of predictions of a recession in 2023 caused by the current inflationary environment and the Federal Reserve’s efforts to rein it in. 

A recession can be defined as a significant decline in economic activity that persists for a number of months or even years. For example, the “Great Recession” of 2008 lasted for 18 months. Even when a recession is officially over, individuals and businesses may still feel its effects for a while. 

Today’s economic outlook is mixed, even sometimes contradictory—to the consternation of economists. While inflation looms like a raincloud, the traditional metrics that economists use have all been healthy lately:  

• The U.S. GDP increased by 2.6 percent annually in the third quarter of 2022. 
• The national unemployment rate has stayed within 3.5-3.7% since March 2022. 
• Retail sales are forecasted to rise by 6-8% this holiday season from last year. 
• Compensation has also increased by 1.2% recently. 

This is in spite of the Federal Reserve’s efforts to cool inflation via interest rate hikes.  These hikes are actually intended to slow economic activity enough to restore a healthy balance between supply and demand. Yet people are holding onto their jobs and even getting raises, so they are still spending. The once ‘red-hot’ housing market is cooling down a bit with higher mortgage rates, but there is still a shortage in supply of homes for sale versus demand. 

So, what’s a small business owner to do to prepare? Buckle your seatbelt for a bumpy ride and follow these tips to be prepared for a recession–whether or not it actually comes, you will be in a stronger financial position overall. 

Give yourself a cash flow cushion. 

Healthy cash flow is always an important part of running a business, but especially during a downturn. Prepare for a recession by building a cash reserve of at least six months’ worth of operating expenses. “Easier said than done,” is what many of you readers are likely thinking.  First, the sooner you start the better.  We define the six-month cash reserve as an amount enough to cover essential operating expenses only, such as debt payments, rent or mortgage payment, utilities, payroll, and inventory or supplies.  Lately, some of our clients have shared that inventory management has been increasingly challenging, and that they have spent more time on that since too much inventory can take more of your limited cash out of play, but at the same time, too little inventory can impact your sales.  So having the right amount, and the right mix of inventory is very important. 

One of your primary goals is to maintain adequate liquidity so you can ride out a recession. The majority of businesses that fail do so because of cash flow mismanagement. So, efficient use of your cash, and staying on top of your cash flow, will put you in a stronger financial position and give you some valuable flexibility.   

For assistance in optimizing your business’s cash flow, we offer a complete array of  Treasury Management services such as ACH Origination, Sweep Accounts, Zero Balance Accounts, and more.   And know that we are always available to discuss your options. 

Don’t neglect business forecasting. 

Forecasting for your business means looking at historical and current data, along with trends in your industry and the market, to predict your business’s future performance. A regular forecasting practice supports a healthy cash flow by helping you anticipate expenses and adjust spending as needed. 

While forecasting during a recession can be difficult because there isn’t a baseline of historical data and different industries are affected differently by downturns, you can still look back to the Great Recession as a comparison. 

During normal economic times, you don’t need to worry about forecasting other than on a monthly or quarterly basis. However, during times of economic troubles such as a recession, you might need to forecast more frequently to get a clearer picture of what the future holds for your business. 

Use Cogent Connection, our all-in-one digital platform, to view account balances and past account statements. 

Look for expenses to trim. 

Don’t wait until you have to make cuts. Now is the time to identify non-essential expenses that could be trimmed or cut entirely. You can prepare for a recession by making those (often difficult) decisions now. If things do get worse, you will have already identified what can be cut should the need arise. 

This is also an opportunity to get clear on what ‘essential’ means to your business. Generally, ‘essential’ costs are those that help your business generate revenue and keep the lights on. For example, Marketing costs may not seem essential upon first glance, but they do help you maintain and grow your customer base. So, Marketing may be something you can trim but don’t want to cut entirely. ‘Nice to have’ things like monthly employee lunches, however, could be cut until you are on the other side of a recession.  

From there, evaluate your vendor contracts to see if there may be room to renegotiate better terms. What recurring overhead costs can be reduced or deferred? And so on. At the same time that you’re looking to cut costs, you may need to also raise your prices to adjust for your rising costs.  

Manage your business debt. 

Take some time to review all credit accounts and loan balances that your business is carrying. What are the current balances, interest rates, monthly payments, and term due dates?  Make sure your debt amortization matches the useful life of what it financed. 

Don’t panic and rush to pay off all debts, leaving yourself without enough of a cash reserve to survive a recession. Instead, focus on your higher-interest debts, including business credit cards and loans with variable interest rates, to minimize the effects of higher interest rates. 

Stay on top of your receivables. 

If the U.S. goes into a recession, your business won’t be the only one struggling. This may make it harder to collect payments, but it’s crucial to stay on top of your receivables. Send invoices promptly and follow up regularly to get paid faster and keep your cash flow healthy. If you don’t already have terms stated on your invoices, make it clear that payment is “due upon receipt” and that late fees apply after a certain point. You may also want to start collecting a retainer on higher-priced jobs. Finally, make it as easy as possible for clients to pay you by collecting payment via check, credit or debit card, and ACH. We can get you set up for this with Treasury Management services. 

Take a second look at your staffing needs. 

This can be one of the hardest places to cut, but staffing costs are often also one of the biggest line items in a small business’s budget. Do you need every staff position at its current capacity? If cuts aren’t necessary right now, make a staffing plan for a recession—which positions could be laid off, outsourced, or reduced from full-time to part-time? 

Don’t be afraid to pursue new opportunities.

Anticipating a recession usually inspires fear and uncertainty. Our impulse, both as individuals and business owners, is to pull back, be cautious, maintain the status quo. However, every recession is also an opportunity to pivot, expand, or diversify your business. 

Partner with Cogent Bank to Move Your Business Forward 

We offer customized business banking solutions to help you weather a recession and meet your long-term goals for growth and expansion. Connect with a Cogent associate to discuss your business needs and the specialized banking and treasury management services that could help move you forward.   

 

The information contained herein is for informational/educational purposes only.  The views and opinions expressed in this document may be those of the individuals and may not necessarily reflect those of Cogent Bancorp and its subsidiaries and affiliates, or the entities they may represent. Content contained herein may be used in connection with the advertising and/or marketing of products offered by Cogent Bank or Cogent Private Wealth. The material is not intended to provide or substitute for legal, tax, or financial advice or to indicate the availability or suitability of any Cogent Bank product or service. You should consult with a legal, financial, tax, or other appropriate professional(s) for your specific needs and/or objectives before making any decisions.