8 Steps For Recession-Proofing Your Business

The recession that we’re in right now has been coming for quite some time and may continue for a longer period of time. Just because you find yourself a day late and a load short, it doesn’t mean you shouldn’t implement some changes now to shore up and position your company for growth on the other end of this recession. The following steps can help business owners protect themselves in the current climate.

1. Stop extending credit. Many businesses extend credit under the theory that if they don’t extend credit, they won’t have any customers. A few years ago, that may have been good reasoning, because good customers could, in fact, honor their obligations. In a recession, that becomes faulty reasoning because even good customers have an inability, or less ability, to honor long-term credit obligations. You’re better off having fewer sales. For example, if you make 10% profit on a transaction and just one of your customers is now negatively impacted by the recession and cannot pay you, you lost 100% of the profit on the next 10 transactions.

2. If you are extending credit, accelerate your collection process. Most business people are really lousy at collections. They don’t want to alienate their customers or make them angry. In a recession, you have to adopt a different attitude. The service has been delivered and now there’s an obligation on the other party’s part to pay you. Why would you be bashful about that? It’s your family or their family; it’s your business or their business. This isn’t about trying to be mean to the other guy, this is about asking for what’s fair. Think of it this way: If you and five other businesses have extended credit to the same customer, but you are the only one making the phone calls, who do you think will be the one who ultimately gets paid?

3. Consider factoring. If after exercising the first and second steps you still have receivables, sell them. Factoring companies will buy receivables from you at a discounted price of 10-15% based on their maturity. By choosing this option you will forgo some of the potential long-term profit, but it provides an instant capital infusion, which right now most businesses could use.

4. Expand your financing capacity. Now is the time to try to expand your financing capacity. While it is difficult to do these days, it may be even more difficult next month. Try going to places with which you have existing relationships: your bank, your credit union, your savings and loan, your venture capital, or your private equity partners. Now is when you should be saying, “I know I’m going to have some needs in the future. I know you’re going to have some other customers who are also going to have needs, and financing is going to be competitive. What would I need to do to be able to satisfy you so I am one of the people you do lend to in the future?” That person who lent to you in the past will most likely remain in business, and they will eventually start lending again to someone. Put yourself in the position to be that someone.

5. If you own real estate, sell it. Many businesses operate out of real estate that they own, whether it be retail, wholesale, office, or industrial. A recession is the worst time to have your capital tied up in a long-term investment, even if it is one that ultimately could appreciate. Granted this is not a great time to have to sell anything, but if you can sell the real estate and lease it back, you have the value and the benefit of that additional capital now, even though you will have a rent obligation that you didn’t previously have. For example, if you sold a building for $1,000,000, and now have a new rent obligation every month of $20,000, you’d still have $980,000 in the bank today.

6. Make cuts on your Profit and Loss Statement Consider sitting down with your P&L, picking up a color pen or highlighter, looking at every single line item, and determining what you can cut. We all grow to our environment. When business is good and the economy is booming, we expand and we grow. We may even get a little lackadaisical, lose our efficiencies, and overstaff our operations. When your company has less business, you require less assistance to deliver the new lower volume of work. Acknowledge that, and decide who in your company doesn’t need to be there anymore. For example, fire your assistant. Make your own coffee, take your own notes, and do all the things that your assistant does to make your life easier. If you fire your assistant, you’d have to do more work and life wouldn’t be quite as cozy as it used to be, but your business would be saving the cost of the assistant’s salary immediately.

7. Take the money you’ve saved from cost-cutting and use it. You’re not saving money to put the money in the bank; you’re saving the money to spend it in a place where you now need to spend it. If your budget was $100,000 a month and you can cut $10,000 from  somewhere, your budget next month should be $100,000. Take the example of the assistant: If you fire your assistant, hire another salesperson. Put your money where it can grow rather than where it can create more comfort.

This step alone can transform the business, not because it’s such a significant item, but because of how it changes your relationship with your competitors. The majority of companies cut marketing during a recession. Now, they’re less able and less competent to go out and gather new customers.