7 Strategies for Surviving a Recession

“Forget profit and balance sheet and devote all attention to cash flow“.

That was the number one theme from a recent survey of 89 New Zealand business owners who have survived past recessions.

A business can keep going as long as it has cash.

The most vulnerable businesses – and people – live week to week, relying on next week’s sales to pay their current bills.

These businesses are already failing, but if the financial fallout continues, stronger businesses will follow.

Know Your Runway Length

Do you know how long your business can survive a recession?

This is your “runway” and knowing how long you have before you fall off the end is your starting point for developing recession survival strategies.

To calculate your runway, forecast your cash flow for at least the next six months.

Start with your current bank balance, plot your expected cash inflows and outflows for the next several months and your projected monthly closing bank balances.

For this exercise, you want a worst-case scenario forecast.

Conservatively estimate when you can start rebuilding revenue presuming the recession runs deep and long as many are predicting.

A period of zero revenue maybe followed by a gradual build up towards pre-recession levels, over the next year or so.

Once you know your runway length, work through the following strategies to extend it.

Claim Your Assistance

Cash is king so claim your wage subsidy, and any other unconditional help, as soon as possible.

And stay tuned for further assistance announcements.

You qualify for the wage subsidy if covid-19 has reduced your revenue by 30% or more, for a month between January and June 2020, compared to the relevant month last year.

You can get the subsidy for each employee that you intend retaining for at least 12 weeks from 17 March 2020.

Employees include yourself if you are a sole-trader or a shareholder employee.

Cash Up Your Assets

Businesses always have money tied up in assets.

Your priority now is cash so, starting with the most liquid assets (those most quickly turned into cash), prioritise converting them to cash.

Debtors: These are one step (payment) away from cash.

The longer you leave your debtors outstanding, the harder they are to collect, and in the current environment, your customers’ ability to pay is rapidly declining.

Proactively follow up overdue debtors and make payment arrangements if necessary.

Completed Projects: Invoice any completed but unbilled work.

The longer since the work was done, the less inclined your client will feel like paying for it.

Work in Progress: Focus on finishing and invoicing partly completed jobs.

If the economy continues downhill, customers will start cancelling orders.

Fixed Assets: Do you have non-productive equipment that you can turn into cash?

Consider selling surplus vehicles or equipment if they have a resale value but are not helping you generate revenue.

Cut Costs

The first three strategies for surviving a recession focus on increasing cash. The next two strategies focus on slowing cash outflows.

Review your forecasted cash outflows and cut what you can as soon as you can.

Consider leases of office space and equipment, advertising and sponsorships, subscriptions and insurances.

Tax maybe you biggest business expense taking up to a third of your profit. Do not pay more than you must.

There have been covid-19 related tax announcements and more will follow.

Keep in touch with your accountant about how these may affect you.

If you cannot make upcoming tax payments, setup arrangements early. Your options reduce once the tax is overdue.

Defer Your Mortgage

If you own your home, a major part of your business drawings may be to cover your mortgage.

Banks are currently offering up to six months mortgage repayment holiday.

Remember that interest will still accrue, increasing your loan balance.

If you end up not needing the holiday, you could make a lump sum payment later.

Alternatively go interest only, keeping the loan balance constant so you can start paying it down again post-recession.

Apply for a Business Loan

If you still look like you’ll reach the end of the runway before the end of the recession, you may need to borrow cash for the short term and repay it over the longer term.

Banks are offering loans up to $500k to businesses with annual turnovers from $250k to $80m.

The Government Finance Guarantee Scheme (GFGS) guarantees 80% of the loan, leaving the banks exposed to just 20%. This reduces the bank’s risk, allowing them to lend more.

Normal lending conditions apply so get organised first.

Banks want to see current, realistic forecasts. Forget pre covid-19 trading conditions and show them a realistic plan to get through the lockdown and recovery period.

Rethink Your Business Model

Covid-19 is changing the way we do business and some changes may be permanent. This is a threat to existing business.

It is also an opportunity for more profitable ways of doing business.

Service Delivery.

Evolving technology is enabling new ways of delivering services and your clients are getting used to new ways of receiving them.

Can you deliver more services electronically, saving valuable time and cost?

Can you leverage your knowledge to create new revenue streams?

If you sell advice, can you adapt the information you have provided to one client so it can be repurposed into generic advice for others and delivered via online courses or webinars?

Pricing

Can you change your pricing models to give cost-wary clients more certainty?

A fixed price service can relieve the fear of purchasing.

Just as no one knew six months ago what we are dealing with now, no one knows what we will face in six months.

But the firms that come out the other end will be those prepared for the worst-case scenario.