You're probably able to spot opportunities where others only see headlines. And when the forecast isn't good, you're no doubt thinking about how those changes could affect your business.
Whether it’s inflation or rising interest rates, or global events that could disrupt your supply chain, you can’t just react, you need to proactively prepare.
So let's look at what you can do to protect your business against an economic downturn.
Start by getting the big picture
There are a number of steps every business owner should take whenever there is doubt about the future of the economy.
Understand how your customers and suppliers are affected
In times of uncertainty, it’s essential to take the needs of your customers and partners to heart. It doesn’t have to be complicated; just make a phone call to your key customers. These conversations will help you understand how the market for your goods or services is changing, and how you should respond.
Answer the following questions to the best of your ability:
Do my customers modify or reduce their orders?
Should I explore new markets?
Will my suppliers be affected in a way that could disrupt my purchases?
Review your production plan and focus on efficiency
These conversations should lead you to review your production plan to ensure that the goods or services you produce will find buyers in the market.
The other key step in production is to maximize output while minimizing unnecessary expenses. Measure your performance to see how you’re doing against internal goals or benchmarks , such as industry averages. You can then begin to improve your bottom line by reducing delays, improving quality, and reducing any form of waste .
Focus on financial management
Finally, in a context of economic slowdown, your finances must be at the center of your concerns. Take full measure of them.
Let's take a closer look at how you can achieve this.
Upgrade your operational financial processes
In times of economic stress, it’s important to have a clear doctor database picture of how your business is performing at all times. You don’t want to rely on guesswork or gut feeling. You need hard data and a process that tells you how your results are changing over time so you can track your business’s financial performance and identify potential issues that need to be addressed.
Ensure the quality of your financial data
Every business must keep accounting records – it’s the minimum requirement for, for example, filing your annual corporate income tax return or your GST or HST returns . You probably have a bookkeeper – or an accountant – who helps you collect this basic financial information.
The first step is to make sure you collect:
relevant and reliable information,
at the source,
depending on needs.
This financial data will not only be used to prepare your financial statements, but also to review progress towards achieving your financial goals.
You also need to make sure that you are using a properly set up accounting system . Your general ledger accounts should be well structured and organized, allowing you to enter financial data in a way that reflects your operations. The better structured and organized your accounts are, the more useful the financial data will be for making decisions.
Create a budget and financial projections
The next step is to use the data you collect to make your forecasts.
Developing a comprehensive annual budget, prepared monthly, is an essential component of sound financial management practices.
By “complete” I mean that your budget should include:
a statement of results;
a cash flow statement;
a balance sheet.
The three must also be interdependent.
Unlike financial statements, which focus on what has already happened, your projections are forecasts of future revenue, cash flow, and financial position.
They will serve as an early warning system, helping you anticipate cash flow declines, potential reductions in investment or operating costs, or additional financing needs.
More importantly, preparing an initial budget gives you the opportunity to examine the impacts that different scenarios – from best to worst – could have on your business, and to plan strategies you could use in such cases.
Especially in times of economic downturn, you want to be able to establish a plan and compare against it .
Collaborate with your team
Properly preparing a budget is a great way to bring the operational and financial aspects of the business together to set priorities for the year and get everyone working in the right direction.
We often see businesses where one person is alone in an office preparing a budget, with no input from other key members of the sales or operations team. This is how you set yourself up for failure.
Financial management is like building a house: you need multiple people with expertise, each with their own specialty, working together and depending on each other. You need to bring your entire team together, from sales to marketing to HR to operations.
Measure your current financial health
To deal with economic uncertainty, you need to start by taking stock. That means assessing the financial health of your business.
This is typically done using financial ratios , which fall into four different categories.
Financial Ratios: 4 Ways to Evaluate Your Business Performance
Graph of the 4 financial ratios
Enlarge image
Liquidity
Is your business able to pay future bills? This is something that banks and investors consider when assessing the short-term viability of a business.
Profitability
How much profit does your business make – or lose? This is the revenue you have left over after paying costs.
Productivity (or efficiency)
How long will it take you to convert your production into cash? This period is commonly referred to as the “ operating cycle .” The shorter the operating cycle, the better your liquidity.
Financial leverage
How much debt do you use in your operations? Profitability does not always mean financial health. Your business could be heavily leveraged and experience short-term cash flow problems.
