Nobody is certain if and when the recession will come, but cooling of the economic growth is already happening. Therefore it is prudent and even necessary for companies to prepare for such scenario.
Take action today while the economic situation is still favorable, to make it easier to adjust if and when recession strikes.
1. Prepare a scenario for a 20% drop in orders
No matter the economic circumstances, it is always a good idea to have different future scenarios for your business. Examine how your business will be affected by major changes in economic activity and come up with a list of actions you can quickly take when such changes occur. At a time when business activities seem to be cooling, ask yourself what would happen if your orders fell by 20 percent.
2. Provide cost flexibility
Pay attention to the cost structure. If there is a downturn in economic activity, you need to be able to adapt quickly and not be burdened with too many fixed costs. Try to replace them with variable ones. Where possible (equipment, business vehicles) use leasing instead of purchase, connect with employment agencies.
3. Secure sufficient finances for the proper liability structure
Adjust the liability structure (repayment of financial liabilities) to the estimated cash flow. It is essential that you generate enough free cash flow all the time. Free cash flow should be enough for at least 150% of annual liabilities to banks. If you determine that you will need cash in the near future, secure it today, even though you do not need it at this time. It is better to think about money sooner rather than when the situation forces you.
4. Control working capital
The need for working capital in business must always be monitored and controlled. Companies that effectively manage this have a big advantage over their competitors. Also consider managing your liquidity by selling your receivables.
5. Ensure a minimum two-month realization in liquid assets
The liquid assets you need for a two-month realization should be in the form of cash on your account or bank liquidity credit and tailored to your business activities. The maturity of the liquidity facility should be two to three years. Adequate liquidity buffer will also contribute to a good credit rating, since this indicator is also taken into account by the three largest credit rating agencies – Fitch, Moody’s, S&P – when assessing a company’s financial strength.
6. Make sure you have a sufficient repayment term to pay off the loans
You can also secure a liquidity buffer by prolonging your loan repayments over a longer period of time depending on your ability to repay loans. The safeguard should cover about 30% of the extended repayments. This provides you with time and financial back up. The key is to reduce the burden on annual free cash flow by extending loan (or loans) repayments.
7. Insure your business
Business risk management is important in all economic conditions, even more so in times of crisis when the risks are greater. They can be reduced with bank trade instruments and financial instrument derivatives to hedge currency or interest rate risks. Make sure the deals you make are also adequately insured.
8. Keep markets diversified
The economic crisis seldom hits all markets simultaneously or with equal impact. Use good economic conditions to penetrate markets where you see an opportunity. By internationalizing and diversifying your business, the decline in economic activity in one of the markets will be less felt, as it will be easier to shift resources to where the growth is (still) positive.
9. Strengthen relationships with strategic partners
Maintain good relationships with your business partners at all times, which is easier when you are doing well. Pay particular attention to strategic partners with whom you will be able to work long-term and retain them even during less favorable times. Reliable partners will help maintain the stability and predictability of your business.
By following these recommendations, you will be better prepared for a potential economic downturn. Even if there is no decline in economic activity, you will be at an advantage, as these are good practices that contribute to a stable business operation at any time, regardless of the economic situation.