Recession survival guide

Plan now for a healthy business later

Upholstery Journal | February 2008

by Patrick Astre

Planning for a recession shouldn’t have to be a necessary part of running a business. We should see a recession coming. The constant wave of business cycles makes recessions as inevitable as surging booms, but the exact timing of them is difficult to predict. Still, like hurricanes, recessions come along once in a while, and occasionally one will wreak havoc on the shoreline.

Seasonal retailers are great business models to demonstrate how to weather recessions. For instance, consider a small business that sells swimming pools and backyard leisure items in the summer. When seasons change its business needs, the business displays snow blowers, wood stoves and chainsaws in September, and Christmas trees in December. Recessions come as regularly as seasons, just not as often. Businesses and consumers should be prepared for them, just as they prepare for winter. Here’s a guide to handle recessions and the inevitable boom that follows.

The basics

When you get right down to it, handling recessions, or any kind of business slowdown, consists of three things: cutting expenses as much as possible without affecting sales and income, maintaining sales and income as much as possible in the current environment, and having and properly using an emergency fund to help weather the storm. Recognizing the basics and actually implementing a plan can be two different tasks.

Understand the financial ebb and flow of your business

You should be using a computerized accounting system. Quickbooks is the premier system right now. If you have an accountant, he or she is probably using it. If you’re using an old paper system and doing your own bookkeeping, your first task is to change. Buy the software and take a course in using it. They are available online, as well as in various classroom settings.

Your primary tools are found in the company financials, sales and customers sections. You will use three key Quickbooks tools: Profit & Loss Statements (P&L), Sales & Representatives, and Customers & Receivables. P&L will allow you to see all your expenses and income—categorized—and will tell you if you’ve made a profit or suffered a loss during that period. Run the P&L as far back as you can, five or 10 years if possible. Do it for each quarter and annually. You will be able to tell what period of time is most profitable, when expenses rise, what the expenses are, when income increases, and in what categories.

If you have a sales force, the Sales section of Quickbooks shows sales details by individual representatives. This will tell you who’s doing the best job and who needs to improve.

The Customers & Receivables section of Quickbooks will show you open invoices and accounts receivables details. You will discover how long it takes you to get paid, and how many outstanding invoices there are for each period. This information is crucial, since the amount of time it takes you to collect payment has a direct impact on your cash flow.

Once you have this information at your fingertips, you’re ready to begin recession-proofing your business.

Cut expenses

A businessperson should be doing this all the time, but beware of cutting things that bring in revenue. The first step is to scrutinize the expenses part of your P&L statement. Take steps to reduce obvious expenses, including energy costs through efficient windows or insulation, superfluous purchases, and eliminating inventory or services that aren’t profitable. The rest are more difficult, especially in these areas:Advertising: Be careful to differentiate between crucial advertising that brings in business and that which doesn’t. Ask customers how they heard of you. Offer coupons that must be brought in so you know the source of the customer. Record the answers and use it to manage your advertising budget.

Advertising: Be careful to differentiate between crucial advertising that brings in business and that which doesn’t. Ask customers how they heard of you. Offer coupons that must be brought in so you know the source of the customer. Record the answers and use it to manage your advertising budget.

Sales representatives: Use your sales records to rank your reps and assign territories. Know ahead who needs to improve their performance. Help them increase their achievements if you can, and cut them if you must. Although this may be a difficult task, keep in mind that, in a recession, the survival of your business may be at stake.

Employees: Laying off people is the kind of thing that makes you wish you hadn’t gone into business. Examine closely the functions of each employee. In a recession, you may be forced to retain only key employees. Be ready, have the decisions made ahead of time and hope the day never happens. Prepare yourself to carry it out if the time comes.

Watch your cash flow in good times

There are many dangers of financial complacency. Economic slowdowns can blindside a business. Collections are abominably slow, expenses are high and it’s a scramble to get rid of bad habits that developed during economic booms. Before you know it the “Going Out of Business” sign appears on the door. Straighten it all out during the good times when you think you don’t need to—because you really do need to.

Set up an emergency fund

If you do nothing else, at least do this. Start putting 10 percent of gross profits in a ready, liquid fund tied to your business. Use a good steady bond fund like Vanguard Intermediate-Term Tax Free Municipal Fund, or ING Direct. Consider this another expense. It might save your business some day. Keep going until you have at least six months worth of your business’ gross income.

In addition, have a ready source of credit in case a deep recession comes along and you need more cash. Be a miser with your expenses and a hog with your savings. It could help save your business during a recession.

As you ponder this information, keep in mind it is a basic, commonsense guide to recession-proofing your business. In reality, executing these simple tasks will improve every aspect of your business and boost your bottom line. It will feel good when you accomplish these goals, and you’ll sail through the next recession with a smile and a healthy business.

Patrick Astre, Certified Financial Planner, Enrolled Agent, Registered Financial Consultant, is an author, speaker and a recognized tax and financial expert specializing on the economic issues of longevity. As the founder of Astre Planning Inc., Astre has been advising individuals, small businesses and corporations for 40 years. His clients include ING Direct, Princess Cruises and Emerald Passport International. He is the author of “This is Not Your Parents’ Retirement” (Entrepreneur Media Publishing) and “Educated Investing and the Four Seasons of Money.” For more information, contact Astre at +1 631 744 9100 or visit him online.

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