Economic Recession Looming? How to Prepare Your Business
Economic Recession Looming? How to Prepare Your Business
In the past two years, the U.S. has experienced upheaval from the COVID-19 pandemic, an economic recession with unemployment levels not seen since the Great Depression, massive fiscal stimulus packages, the worst inflation in four decades, a rapid increase in short-term interest rates, the war in Ukraine, and the onset of what may be another economic recession.
U.S. consumer prices surged 9.1%% in June 2022, the largest yearly increase since November 1981. The energy index soared 7.5% in June and 41.6% over the last year, the largest 12-month increase since the year ended April 1980. The producer price index, a measure of the prices received for final demand products, increased 11.3% from a year ago in June. Of that gain, almost 90% came from a 10% increase in final demand energy costs as prices for oil, natural gas, and other products soared. The rapid price surge at the producer and consumer levels prompted the Federal Reserve to tighten monetary policy and aggressively raise short-term interest rates.
Persistently high inflation and higher interest rates are causing a business slowdown which may push the U.S. economy into a recession.
What’s a Recession?
GDP in the U.S. fell 0.9% annualized in the second quarter of 2022, following the 1.6% annualized decline in the first quarter. The second straight quarterly decline in GDP meets the widely accepted rule of thumb for a recession. The National Bureau of Economic Research (NBER) officially declares recessions and expansions, but it probably won’t make the call on this recession for some time.
Is an Economic Recession Looming/Are We Entering into a Recession?
The overwhelming majority of corporate executives are bracing for a recession, according to a new survey by Stifel Financial.
Nearly all 70 business leaders surveyed believe the U.S. economy is either already in a recession (18%) or will face one within the next 18 months (79%). Only 3% think that one will be avoided entirely.
The survey also found inflation and the tight labor market represent the two biggest perceived threats to running a business today. 53% of respondents believe that inflation will be an issue for the next two quarters to a year, with another 43% expecting high prices to continue even longer.
Regardless of what the NBER ultimately decides about this economic slowdown, most businesses believe the U.S. economy is already in a recession or will face one within the next 18 months.
How to Prepare for a Recession
Small and medium-sized companies are more impacted during periods of economic downturn or recession and are typically the least prepared. They tend to have limited financial resources and usually find it more difficult to obtain working capital because banks tighten credit requirements and focus on large, well-heeled customers in a recession. High inflation and higher interest rates will make this recession more difficult to weather because almost everything is more expensive, and more working capital will be needed to finance the additional costs.
The key to surviving a recession is all about preparedness and cash flow management. The following are some strategies businesses can use to prepare for a recession and increase their staying power.
Revise Budgets and Forecasts
If you are not already doing so, prepare a 24-month rolling budget and sales forecast to determine the staffing, programs, operations, and working capital you will need to weather the recession and maintain your core strengths and long-term growth objectives. Regularly review and revise the projections so changes to your operations can be implemented in real-time. Don’t delay taking steps to implement your revised plans. Delaying may jeopardize your plans and force you to take more drastic actions later.
Cut Fat, Not Bone
Avoid cutting key personnel and sales, marketing, and product programs that are your company’s future. Remember how difficult it has been to find good, qualified people when you make staffing decisions. Get your people involved in finding ways to do more with less. They can be your best source for ideas to work smarter. Your sales, marketing, and product programs are the link to customers as well as the marketplace and your source of future growth. By resisting the urge to make cuts in these areas, you will be able to position your business to capitalize on the recession and potentially scoop up market share.
Accelerate Cash Flow
Use invoice factoring to accelerate the conversion of accounts receivable into immediate cash instead of waiting 60 days or more to be paid. Invoice factoring is easier to obtain and more flexible than a bank loan, and credit approval is based on your customer’s financial strength, not your company’s credit rating.
Manage Accounts Payable
Make sure you take full advantage of your suppliers’ payment terms. Ask suppliers for better payment terms, especially if the terms are not competitive in your industry. If necessary, stretch payments to suppliers as long as it does not affect your relationship, trigger a credit hold, or impact your credit rating.
Increase Working Capital Facilities
Having sufficient working capital and the right type of funding facilities is critical. Take steps now to obtain the working capital your company will need. Invoice factoring and PO financing programs can increase your working capital without reducing availability on your bank credit facilities.
Work with a Factoring Company
During economic downturns and periods of recession, traditional financial institutions, along with banks, may not be able to provide sufficient working capital due to lending limits. You may also find you fall outside the risk threshold to access and retain lines of credit from these sources. Factoring companies, such as Capstone, can custom-tailor invoice factoring, PO financing, and trade finance programs to dovetail with your business model. Factoring companies are more flexible and easier to work with than traditional funding sources as well as provide funding based on the financial strength of your accounts receivable instead of your business’s credit profile. Factoring companies also provide faster approvals and access to funds than other traditional funding sources.
What Some Companies Are Doing to Prepare for a Recession
A new survey released by PwC Consultancy this month showed that 50% of companies plan to reduce overall headcount.
Tesla announced plans to layoff 10% of salaried staff and freeze hiring worldwide. Elon Musk said he has a “super bad feeling” about the economy and believes the U.S. is already in a recession.
Ford plans to lay off 8,000 salaried workers. A spokesman commented that Ford is “working to reshape the company.”
Google CEO Sundar Pichai told employees that the company is “facing a challenging macro environment with more uncertainty ahead.” He added that the company needs “better results faster.”
No matter what strategies are being undertaken, business leaders can agree that robust planning and effectively utilizing business data and analytics are critical when preparing for an economic downturn.
Business owners can survive a recession and be in a position to take advantage of opportunities by preparing ahead and implementing the above strategies now. You will also avail yourself of more funding options when you are not operating in crisis mode and when the financial health of your business is at its strongest.
Whether we’re simply seeing an economic slowdown or a full-fledged recession, Capstone is here to help you stay focused on what you do best – running your company. We have the experience and resources to custom-tailor invoice factoring and P.O. financing programs for your business.