There are good times, and there are bad times; such is the nature of the economy. Every business needs to learn with the alternating cycles of growth and decline. However, the effects aren’t distributed equally. Some industries emerge unscathed, while others may never recover. For instance, it’s estimated that over 20 million Americans lost their jobs in the last year. Half of those jobs may never come back. For business owners, this spells serious trouble.
Entrepreneurs are aware on some level that they need to prepare for lean times. After all, financial management is a key aspect of running a business. But few are equipped with the skills to guide their business through tough times. The next few months will take every ounce of your patience and energy. You may need to get a hard loan. Some of your decisions will be painful and difficult, but they could give your business a fighting chance at survival.
Things can quickly go south without a plan, and you need to take decisive action as soon as possible. Here are a few tips to get you started.
1. Slash your expenses
Many businesses have emergency reserves to tide them over during lean periods. But you also need to prepare for the possibility that a lean period may extend for months. You don’t want to run out of money just before the economy recovers, so it’s important to slash your expenses to the bare minimum. This means no parties, new hires, or unessential purchases.
Small businesses are more nimble than large companies. You don’t have to deal with bureaucracy and budget proposals, and making cuts to your expenses should be easier. Go over your budget for the coming year and only retain essential expenses like bills and payroll.
You also need to consider a layoff. Since the employee headcount is related to your business needs, downsizing your operations frees money up for a protracted crisis. Consider closing underperforming branches or reducing orders from suppliers.
2. Downsize operations
We’re all familiar with the adage, “You need to spend money to make money.” But this isn’t really applicable during an economic downturn. When unemployment goes up, consumer spending goes down, and businesses need to hunker down and wait until things improve. An expensive marketing campaign or new capital expenditure won’t make much sense during a recession.
It’s important to separate your expenses into two categories: essential and nonessential. Essential expenses include everything necessary to keep the business running, including labor, rent, and bills. Anything else that doesn’t fit the bill may have to be paused or eliminated.
You may need to sacrifice future growth to ensure survival. Your decisions should be guided by the balance sheet and not emotions or sentimentality. For instance, you may need to sell your historic headquarters and move to a smaller and cheaper office.
3. Ask for help
You shouldn’t be afraid to ask for help, especially if the survival of your business is at stake. Many businesses take advantage of loan forgiveness and other forms of relief, and you should too. Just make sure you communicate your troubles to everyone concerned. You’re only shooting yourself in the foot if you hide the truth from people. Telling the truth is more beneficial in the long run.
Let’s say you’re a bit behind on your loan payments. Instead of hiding from the bank, why not just talk to them about your financial issues. You may be able to secure renegotiated rates or even a temporary pause on payments.
4. Start saving money
All the world’s emergency measures won’t do much unless you have cash reserves to cushion the blow. It’s always a smart idea to build a cash reserve for emergencies. Economic booms don’t last forever, and you need to prepare for the inevitable pop. You’ll thank yourself later once the economy slows down and business starts to dry up.
You can keep the cash in the bank or invest in financial instruments that you can easily liquidate. As a general rule, you want to save up enough cash to sustain your business for three to six months.
A final word
Running a business is already hard enough without thinking about boom-bust cycles and crisis management. These four tips will help you take decisive action and save your business from ruin.