The Great Recession seems like only yesterday. Yet it was five years ago that trillions of dollars of consumer wealth and millions of jobs were lost. Both sales and cash flow for small-business owners seemed to dry up overnight. It was the worst economic crash since the 1930s. Could it happen again?
The Bureau of Economic Analysis recently released its final estimate of GDP for the first quarter of 2014. It shows a decline of the U.S. economy at an annual rate of 2.9 percent. That’s down from the fourth quarter of 2013, when GDP grew at 2.6 percent. This makes the first quarter of 2014 the worst quarter since the first quarter of 2009 during the Great Recession.
While economists blame the results on the severe weather, could we be headed for another recession? By definition, a recession is two negative GDP growth quarters in a row, and historically, they have come at least once every decade.
Whether the next recession is around the corner or years away, we remember the damage the last one did. How can you prepare and protect your business should another recession hit?
1. Focus on profitability, not growth.
Companies need to invest in order to grow their business, but they should only grow profitably. Sacrificing profitability for growth may get a company in trouble with large losses, especially if expected sales lag behind the forecast. Don’t let invested expenses get too far ahead of sales.
2. Stockpile cash.
The single reason that all companies go out of business is because they run out of cash. A sign I always hang in my office as a reminder is “It’s Cash Flow, Stupid.” Forget about the sales line on the profit-and-loss statement and instead examine the cash flow statement. Do you have more or less cash at the end of the month? A simple check of your bank statement will give you the answer. Focus on getting paid from customers, extending payments to vendors, keeping stock levels low and inventory turns as high as possible.
3. Draw on the bank credit line.
Banks want to give credit to companies that actually use it. Unless your business has six months' worth of cash in the bank, draw on that credit line. The cost of this insurance will be worth the low interest paid.
4. Challenge all business assumptions.
Always ask if the business can be done another way. Cockroaches thrive during bad times because they know how to adapt or die. How can the company increase its gross margin? How can it sell to clients at a lower cost? What parts of the business always make a profit, and how can you leverage it? Which are the really profitable customers?
5. Ask customers to substitute your products for higher priced ones.
Is your product now the cheap alternative? In a recession, price can trump all. But why wait until then? Find out from customers if your products can replace something similar that they’re paying a lot more for—often it can.
6. Cut costs now even if revenue hasn’t gone down.
No owner has ever regretted cutting costs too soon. When deciding which costs to cut, use the “cringe factor.” Ask yourself which checks make you cringe when you write them at the end of the month. Cringing means that you are not getting value out of these expenses and need to either cut them or find another vendor that offers those services.
7. Remember resiliency.
Economic cycles come and go. You have been here before and survived. Cheer the good times with parties, awards and trophies. Mourn the bad times for 24 hours, but then let it go. If you place value on action, you’ll have more chances at success.
It's not a matter of if a recession will hit, it's more of a question of when. Get your business ready today, and you can sleep better knowing you are prepared.
Read more articles on how to manage small business cash flow.
Photo: Getty Images