How to prepare your business for a future recession
Conserving cash is the basic tenet of financial management.
Economies around the world periodically go through the cycle of boom and bust. However, the general feeling is that ever since the financial crisis of 2009, the gap between cyclical downturn and growth has shrunk and economic uncertainty is becoming more frequent.
In such cases, it becomes imperative for businesses to prepare and have a strategy to deal with not so favorable conditions. Let us take a look at few steps that a business can take to prepare for a future recession.
Conserve cash – This is the basic tenet of financial management, where it is always good to plan for the rainy days and save some cash. Be it your personal finance or the finances related to your business, having cash at hand is always prudent. This would mean wherever possible, setting aside cash that your business generates as reserves and ensuring you do not dip into it unless you really need it. Conserving cash also means you take a hard look at your costs and ensure you do not make any frivolous expenses.
Improve cash-flow – It does not make much sense if you have large receivables and very less cash. A business can only run successfully when it gets paid on time, so it is imperative to maintain a good cash-flow for your business. It is imperative that you get your customers or debtors to pay on time and if needed provide them with incentives to do so. In case unpaid invoices are becoming a problem, you may also look at invoice discounting and factoring platforms like TReds. However, cash-flow also includes managing your payments. Ensure you pay your vendors on or just before the due date, which will help in conserving cash. You can also evaluate your operating expense to cut back on cost. This can be anything from cutting electricity to perquisites provided to your employees.
Line of Credit – Getting a line of credit can be the most useful thing for a business. Also known as an overdraft facility, these are business loan where the lender fixes an upper limit of the loan and the borrower can withdraw any amount within the upper limit at any time. Interest is charged on the amount that the borrower has used and not the entire amount available at his disposal. Such facilities can be secured or unsecured in nature, but is a boon for small businesses that need to overcome the temporary shortfall in cash.
Raise equity – If your business is doing well and you think others may be interested in being a part of the growth story, it may be good to raise money in lieu of equity in the company. From listing on an SME exchange to private placements, a small business today has the means to raise money through equity. For example, the NSE Emerge Platform has helped SMEs raise Rs 3,136 crore, and has a market capitalization of Rs 8,800 crore. It recently listed the 200th company. Raising money through equity is a good source of raising funds, but is best explored when the economic optimism is high. During a recession or slowdown, it may be difficult to get equity investment. However, as the saying goes, Raise money when you don't need it, you may consider fund raising through the equity route during a boom so that you have enough liquidity as a contingency.
Restructure loans - If you are servicing loans and the interest and premium burden is becoming difficult, you can talk to your bank to restructure it. In most cases the tenure is extended so that the monthly outgo lessens and the amount of money needed to service the loan comes down. One can also try to consolidate debt or go for balance transfer that reduces the rate of interest and subsequently the EMIs.
Diversify – It should not be a practice aimed at riding over tough times, but it makes good business sense to diversify a business. Diversification would mean you are not over dependant on one line of business, which can be impacted when there is a slowdown in the economy. It makes sense to have different sources of revenue so that you are insulated against sectoral slowdowns.
Inventory – Holding on to inventory is locking your working capital. As a business, you must practice and perfect the just in time model of inventory so that you do not hold on to more than what you need. In fact, if the economy slows down and demand for your product decreases, the inventory requirement will also come down. Not holding on to too much will ensure you do not have your money stuck.
(The writer is the CEO, Wishfin.com)