Eventually, the economy will turn—it always does. In recent years, we’ve faced the housing boom and bust, the global pandemic, rising inflation, and higher interest rates. It’s hard to predict when the next economic downturn will happen. Uncertainties about taxes, tariffs, and global events make it even tougher. The real question is, will your business be ready when it happens? Here are a few things that you can do to prepare your business now to be ready.
- Reevaluate Your Financial Forecast
The volatility of recent years highlights the need for financial forecasting. Revise your forecasts regularly. Make sure they include current revenue and expense projections that match market conditions. Forecast many scenarios. Can you cover your fixed expenses if revenue drops by 20%? What would happen if your rent doubled at the end of your lease? With this information, you can quickly pivot if a downturn occurs.
- Strengthen Cash Flow Management
Cash is king. While monitoring revenue and expenses is important, business owners often forget about cash management. Cash is needed to acquire additional assets and pay debt. Here are a few ideas for keeping your cash position strong.
- Closely watch receivables: If times are tough for you, they're probably tough for your customers. Don't let them get behind on their payments. The best-case scenario is to collect your funds upfront. If terms are required, give an incentive to pay sooner rather than later.
- Negotiate with suppliers: Try to get the best terms to extend payments. Many times, vendors will give you a better deal when you buy in bulk. However, don't go crazy buying more than you need and end up with inventory you can't move.
- Build a cash reserve: Warren Buffett is known for keeping large piles of cash and using that cash to take advantage of downturns. Healthy cash reserves can help you weather the storm. As a bonus, this will allow you to take advantage of opportunities that can occur when the economy isn’t the best.
A good rule of thumb is to have at least six months of cash to cover expenses and debt.
- Review Debt and Financing Structures
Over the years, one of the biggest mistakes I've seen businesses make is not having access to cash when needed. Lenders often don’t look favorably on businesses that need cash during an economic downturn. So be prepared: ensure you have access to capital, such as a line of credit, while your company is in a strong financial position.
Also, be aware of your current loan terms and covenants. You don't want to be stuck in the position of being unable to make your debt payments because of rising interest rates. You also don't want your debt called because your business has not maintained the ratios required by the covenants.
- Seek Expert Guidance
Whether the economy is good or bad, outside expertise can be invaluable. Consider partnering with a fractional CFO who can offer tailored insights. Getting expert help can improve your plans for the future; whether that’s for growth or for debt restructuring. A CFO’s guidance can help you sharpen your strategies and avoid common mistakes so that you will be prepared, no matter the economic situation.
No one possesses a crystal ball that allows us to see the future. The best approach is to prepare for an economic downturn now. By adopting proactive planning, enhancing cash flow, reviewing debt and financial structures, and seeking expert support, your business can be positioned to both endure market fluctuations and seize new opportunities in the years to come.
The Author
Steve Weldon is a distinguished Partner at the Florida CFO Group. He is a strategic advisor who helps SMBs achieve financial clarity and sustainable growth. With a background in private equity, public companies, and venture capital, Steve has developed a proven track record of turning challenges into opportunities. Whether navigating a complex turnaround, preparing for an IPO, or optimizing cash flow and profitability, Steve's goal is to empower businesses to reach their full potential. He simplifies the complexities of finance, ensuring clients feel confident and equipped to make strategic decisions. Connect with Steve on LinkedIn.
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If you have any questions or would like to discuss your organization’s finance and strategic management needs, please give the Florida CFO Group a call at 1-877-352-2367 or send us a message. We are here to help you navigate your financial challenges and achieve success.