How To Prepare Your Business For The Possibility Of Economic Downturn

Now that authorities have been relaxing many of the restrictions that were in place due to the pandemic, many business leaders were hoping for calmer conditions, but the latest economic projections are alarming, to say the least. Stocks have already taken a major hit, with the S&P down 15% since the start of the year, and inflation rates are likewise soaring.

Today, only diehard optimists believe the worst is over. Experts are predicting that an impending harsh economic downturn will force scores of companies out of business.

With interest rates starting to rise, the age of easy access to money is potentially ending, and businesses need to adapt fast to survive. Uncertainty has shaken investors and startups are worried about a venture capital slowdown. Yet it is already upon us, with volumes down 10% in Q1 compared to the same quarter last year. 

Here are four key steps you can take to prepare your business.

1. Redo your budget immediately

No matter how recently you created your newest annual budget, it’s probably already out of date because the underlying assumptions about the economy have shifted. You should make it a priority to update the numbers as soon as possible, taking into account the latest information you have available.

To make this process run smoothly, you’ll want to talk to all of your key stakeholders as soon as possible. The urgency of the recalculations should be communicated clearly from the top, with the full support of the C-suite – failure to provide the CFO with adequate support could be catastrophic.

The updates from these meetings should be passed on to the FP&A team with minimal delay. One way to reduce friction in this process is by using an automated, AI-enhanced tool like Hendrix to take meeting notes for you and convert them into actions. This prevents any key information from being missed, and it could mean you can update your budget in days rather than weeks.

2. Keep forecasts up to date at all times

It’s not enough to simply redo your forecasts once in economically uncertain times. Empirical economic trends, and the hype around expert predictions, change rapidly during these periods, and your forecasts must remain dynamic. As we’ve seen in previous financial crashes, when big companies fail, it can cause a domino effect across industries.

If you’re like most companies and use Microsoft Excel to do FP&A planning, you might think you don’t have the manpower to be able to update your forecasts so frequently. Because of how much time you’d need to train staff and the potential mistakes that could be made, it might not be a good idea to leave spreadsheets behind in one go. 

Instead, you can use DataRails, which enhances Excel to automatically pull in data from multiple sources to ensure your forecasts are always up to date, removing the space for manual human error. The value of management being empowered to make decisions based on the best data possible is immeasurable. It could stop potentially fatal decisions from being made.

3. Update contingency plans

This year has already seen the fortunes of some companies collapse dramatically. In May, Terra saw its cryptocurrency LUNA lose almost 100% of its value in a matter of days. The fall was only stopped when trading was suspended. Even days before this, many people were still espousing the merits of the company’s products. This shows that no one is safe, and it’s a bad idea for any company to become complacent. Market sentiment can change at any time.

It’s critical to test worst-case scenarios like what happened to LUNA. What would your company do if investors suddenly lost faith in your ability to deliver? Would you have enough cash to weather the storm? It’s good to know how long your business could survive under different conditions, and if you don’t like the results, then it should spur everyone into action.

Beyond this, you should look at stress testing problems caused by the wider economy. Inflation is abnormally high at the moment, but it could get even worse. You must understand what effect this would have on your unit economics so that you can create a reliable plan to adapt. The better contingency plans you have in place, the less likely you are to panic when things go wrong.

4. Maintain a good credit score

It’s better to know if your business credit score is poor before you need money rather than when you’re desperate. If the worst-case scenarios do come to pass, then you need to be confident that you have a good chance of getting a loan from a bank. A well-maintained credit score could be the difference between bankruptcy and survival.

Luckily, it’s easy enough to check your business credit score online using a service like Experian. You’ll want to ensure you put in place best practices as early as you can to increase your score so you can get more favourable terms later on. 

Simple activities such as reaching out to suppliers and asking for greater leniency with payments can make a big difference. When you have a good relationship, they can share this data with the credit agencies, as they surely have a vested interest in seeing their paying customers survive.

Final thoughts

Unfortunately, it seems like an economic downturn may be coming soon, yet this doesn’t mean you should just give up. There are concrete things you can do to help prepare your business and secure its survival.    

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