How to Deal (as a Business Owner) with Inflation, Recession, and Other Tough Times, Part 1
Recession. Inflation. Stagflation. Economic downturn. Global slowdown.
We’ve all read the headlines. We’ve all scratched our collective heads at the ever-changing predictions on an economic downturn.
It’s something every business owner has on their minds right now: Are we going into a recession? Are we already *in* a recession? How do we deal with inflation? And what do we do if things get worse? The questions (and the worries) can be endless. So what are the answers? Are there any answers?
I can’t tell you what the specific answers are for you. They are probably as unique as your business is. The effects of inflation and/or recession on your business depend on so many factors: your client and revenue mix, your specific expenses, the amount and type of debt your business is carrying, your cash reserves, the financial health of your business before inflation and recession hit. All these things, as well as the decisions you make going forward, will determine the effects of an economic downturn on your particular business.
However, there are certain fundamentals that will always be true when a business faces a crisis. If you, as a business owner, balance these fundamentals well, you will be in the best possible position you can be in when things get tough.
#1 – Cash is everything. The lifeblood of your business is cash. In any economic downturn, credit starts tightening up pretty quickly and interest rates rise. The businesses that survive and thrive in these times are the ones that preserve cash flow at all costs. If you started out with (and are maintaining) a healthy cash reserve, then you will have a much easier time than the business that does NOT have a cash reserve when a downturn hits.
If your business has a healthy cash flow, keep it up. If it doesn’t, do everything you can to get it flowing; tighten up your collection policies, negotiate shorter payment schedules with clients, or longer payment schedules with vendors, if you can. Put some cash in savings and keep it there. And then try to maintain a cushion of cash that will cover 3 to 6 months’ worth of operating expenses.
#2—Do something about debt. So I just told you to hang onto your cash. But even as credit tightens up in recessionary economies, interest rates will go up. The Federal Reserve may change its mind, but we started off 2022 with rumors of several interest rate hikes planned throughout the year. If you have debt that is subject to a variable interest rate, you might feel the pain in your pocket pretty quickly. If you can convert that debt from a variable interest rate to a fixed rate, do it sooner rather than later. If you can’t do that, then try to pay off your variable interest rate debt as quickly as possible while trying to conserve and improve cash flow in step #1.
#3 – Determine what expenses can go and what expenses must stay. Now is the time to take a close look at your expenses and determine where it is that you can tighten the belt. In a service business, the
largest expense will usually be payroll, and you may not have a lot of wiggle room in that category, especially if you want to keep the great team you’ve assembled so far (see #4). But it may be time for a hiring freeze.
And you can still look at your other expense categories and ask the hard questions. Is this subscription or that purchase really necessary right now? Can we switch to a lower-cost provider without harming the quality of our services? These are the kinds of judgments you will have to make as you look at your expenses.
These are just a few of the things you need to consider when faced with tough times. In part 2 of this series, we will look at some more fundamental principles business owners need to consider in times of economic distress.