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Preparing for a Recession

ID 81060106 © One Photo | Dreamstime.comWhy would you consider thinking about a recession when we’re in the middle of a boom economy? Because every boom is followed at some time by a bust. No one knows when such a bust will occur, how severe it will be, and how long it will last. But it can’t hurt to spend time now making sure you can withstand an economic downturn.

Watch your expenditures

The Federal Reserve (“the Fed”) said in late November 2018: “High leverage has historically been linked to elevated financial distress and retrenchment by businesses in economic downturns.” In plain English, the current level of corporate debt may be signaling trouble to come.

Basically, to prepare for a recession (and, by the way, help your bottom line even in good times) it’s helpful to trim expenditures. This includes watching your debt (i.e., trimming your interest expenses). It also means keeping an eye on ongoing expenses and being careful not to overspend while business is good.

Monitor your inventory

One of the trickiest things for any business is managing inventory. It costs you money to carry inventory, and it feels like a very heavy burden when the economy is struggling. Like Goldilocks, you don’t want too much, or too little, on hand; you want your inventory to be “just right.” Work with your CPA or other financial advisor to know how much of a reserve is advisable in your industry.

Create a financial backstop

You want to have the financial wherewithal to see you through bad times. There are two key ways to do this:

  • Create your own rainy-day fund. This means putting funds aside rather than spending them (including distributing them as bonuses to you and your staff). “Retained earnings” can go a long way when cash flow slows up. C corporations need to watch their retained earnings to avoid tax penalties.
  • Get your borrowing ability in shape. Mark Twain supposedly said “a banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” The best time to secure a line of credit is when you don’t need it. Then it will be there to help you if things get tough for a while (assuming you are in solid enough position to carry the line and service it).

Keep marketing

When business is good and you’re very busy, there’s a tendency to slacken your marketing efforts. Don’t! You continually need to be working on new business, while satisfying your existing customer base.

Final thought

According to the National Bureau of Economic Research, the last recession in the U.S. began in December 2007 and ended in June 2009. Many economists say we’re long overdue for some economic pullback if not a full-blown recession. It’s bound to come at some time. Prepare now for the inevitable.