The basics: When you get right down to it, handling recessions, or any kind of business slowdown, consists of three things:
- Cutting expenses as much as possible without affecting sales and income
- Maintaining sales and income as much as possible in the current environment
- Having and properly using an emergency fund to help weather the storm
Understand the financial ebb and flow of your business. You should be using a computerized accounting system. Quickbooks is the premier system right now. If you have an accountant, they’re probably using it. (If you’re using an old paper system and doing your own bookkeeping, your first task is to change immediately. Buy the software and take a course in using it. Courses are available online, as well as in various classroom settings).
Your primary tools are found in the company financials, sales, and customers sections. You will use three primary Quickbooks tools:
- Profit and Loss Statements (P&L): The program will allow you to see all your expenses and income — categorized — and tell you if you’ve made a profit or suffered a loss during that time period. Run the P&L as far back as you can, five or 10 years if possible. Do it for each quarter and annually. You will be able to tell what period of time is most profitable, when expenses rise, what the expenses are, when income increases, and in what categories.
- Sales and Representatives: If you have a sales force, the Sales section of Quickbooks shows sales details by individual reps. This will tell you who’s doing the best job and who needs improvement.
- Customers and Invoices: The Customers & Receivables section of Quickbooks will show you open invoices and accounts receivables aging details. Now you will know how long it takes you to get paid and how many outstanding invoices there are for each period. This is crucial since the amount of time it takes you to collect has a direct impact on your cash flow.
Cut expenses. Actually, a wise businessperson should be doing this all the time. The trick is not to be like the butcher who backed into his meat grinder and got a little behind in his work. Trim only the fat, and beware of cutting things that bring in revenue. The first step is to scrutinize the expenses part of your P&L statement. Take steps to reduce obvious expenses that can be lowered. Reduce energy costs through efficient windows or insulation, cut superfluous purchases, eliminate inventory or services that aren’t profitable — that’s the obvious stuff. The rest is more difficult, especially in these areas:
- Advertising: Be very careful to differentiate between crucial advertising that brings in business and that which doesn’t. Ask customers how they heard of you. Offer coupons that must be brought in so you know the source of the customer. Record the answers and use them to manage your advertising budget.
- Sales Representatives: Use your sales records to rank your reps and assign territories. Know ahead of time who needs to improve their performance. Help them increase their achievements if you can, but cut them if you must. In a recession, the survival of your business may be at stake.
- Employees: This is another tough row to hoe. Laying off people is the kind of thing that makes you wish you hadn’t gone into business. Examine closely the functions of each employee. In a recession you may be forced to retain only key employees. Be ready, have the decisions made ahead of time, and hope the day never comes. Prepare yourself to carry it out, however, if it must be done.
Set up an emergency fund. This is crucial. If you do nothing else, at least do this. Start putting 10 percent of gross in a ready, liquid fund tied to your business. Use a good steady bond fund like the Vanguard Intermediate-Term Tax Free Municipal Fund, or ING Direct. Make believe this is another expense, and it is — it’s an expense that might save your business some day. Keep going until you have at least six months worth of your business’s gross income. In addition, have a ready source of credit in case a deep recession comes along and you need more cash. Be a miser with your expenses and a hog with your savings. Put it away till it hurts. It’ll pull your bacon out of the fire in a recession.
And there you have it, folks — a basic, commonsense guide to recession-proofing your business. In reality, doing this will improve every aspect of the business and boost your bottom line. It’s just like the guy who painfully banged his head against a wall. When he was asked why he was doing this, he replied, ''Because it feels good when I stop.''
It will feel good when you get this done, and you’ll sail through the next recession with a smile.
About the Author
Patrick Astre — Certified Financial Planner, Enrolled Agent, Registered Financial Consultant — is an author, speaker, and a recognized tax and financial expert specializing on the economic issues of longevity. As the founder of Astre Planning, Inc, Patrick has been advising individuals, small businesses, and corporations for nearly 40 years. Some of his clients include ING Direct, Princess Cruises, and Emerald Passport International. He is the author of This Is Not Your Parents' Retirement (Entrepreneur Media Publishing) as well as Educated Investing and the Four Seasons of Money. For more information, contact Patrick at 1-631-744-9100 or visit www.ProsperousBoomer.com.
