Luckily, there are steps you can take to prepare your business for the recession ahead. They’re easy to implement, and they can have a big impact on your ability to weather the storm. So read on, and get started now.
1. Put your fixed expenses on trial
- Fixed utilities (ie. internet, phone)
- Property taxes
- Fixed interest payments
- Depreciation and amortization
Before you do any other fine-tuning, you should aim to tighten up your fixed expenses.
Fixed expenses are important because typically it’s hard to be sure how much money your business will make each month. But when you know your fixed costs, you know the minimum you need to earn to keep your business going. That makes planning ahead easier. Look for ways you can reduce your fixed costs, and you can begin building a new budget for your business.
Because of COVID-19, some typically inflexible fixed business expenses may now be negotiable. For instance:
- Rent. In the interests of keeping long-term tenants, some commercial landlords have been reducing or deferring rent payments during shutdowns. But they may not offer one unless you ask.
- Interest payments. Many banks are giving clients the opportunity to defer interest payments.
- Taxes. Your state or municipal tax payment deadlines may be pushed forward. So, even if you need to pay your taxes later, you have more cash to work with now.
Find other ways to reduce your fixed expenses. For instance, you may be able to switch to a leaner phone plan, or agree to share wi-fi with a neighboring business.
2. Shrink your variable expenses
Variable expenses change month to month. Often, they increase or decrease according to how many sales you make, hours you bill, or products you manufacturer.
Some typical variable expenses:
- Cost of raw materials
- Per-piece labor and hourly wages
- Distribution (shipping, restocking)
- Utilities (tied to how much you produce)
Variable costs are harder to predict than fixed ones. For instance, if you’re not sure how many ice cream cones you’re going to sell next month, you may not know how much you’ll need to spend on ice cream.
But even if they’re unpredictable, you can cut variable costs as they occur. Using the ice cream example, you may be able to save money by buying ice cream in bulk and storing it, rather than buying on an as-needed basis.
Another way businesses trim their variable expenses: Limiting their offerings. Many restaurants forced to shut their doors due to COVID-19 switched to takeout-only service. In some cases, they also started serving reduced menus.
In this case, reduced menus streamline restaurant operations, cutting back on wastage and allowing them to operate with skeleton staff. You may find that, by sticking to your most popular products or services, you can likewise lower variable costs.
Heads up: Expenses you shouldn’t compromise
As you’re reducing your expenses, there are a few you should avoid trimming back:
- Healthcare coverage for you or your employees. An unexpected hospital bill can be disastrous for finances, especially during a recession.
- Accounting and bookkeeping. In order to apply for disaster relief or low-interest loans, you typically need complete sets of financial statements. Letting your bookkeeping slip now could limit your options later on. We recommend letting our partners at Bench take care of your books.
- Marketing. Rejigging your marketing plan during a recession can help your business stand out at the same time competitors are cutting back their efforts. You may want to focus your marketing on affordability, or changes in customers’ daily routines.
3. Double check your insurance coverage
- Business Interruption. Typically, business interruption insurance only applies if you lose business because of damage to your property. However, you may be able to argue that “contamination” making your property unusable qualifies as damage.
- Interruption by Civil Authority. Different plans offer different extents of coverage. But if your business was forced to close its doors, or even reduce its hours, as a result of government orders, you may be able to get compensation.
Even if you’re unsure, it may be worth filing a claim. When it comes to ambiguity in insurance policies, courts often favor the policyholder rather than the insurer.
4. Refinance debt with low interest loans
This is an excellent time to refinance your debt and lower your recurring interest payments. Pay off what you owe with a low interest loan, and you’ll immediately have more available cash flow each month. And, in the long term, you’ll be paying less to borrow.
5. Be honest with vendors
Many companies are offering free services, skipped payments, or extra lenience for late payments in order to support their clients during COVID-19. You may be surprised at how flexible your vendors or service providers can be. After all, it’s likely that many of their clients are facing trials similar to your own. It’s in vendors’ best interest to hold on to clients during the recession and keep their own revenue streams open.
Even if your vendor won’t budge, it’s important to be upfront with them now. It’s an invitation for them to be open as well, and communicate any anticipated interruptions in service ahead of time. Vendors and clients rely on each other—there’s no sense letting your relationship break down during a crisis.
BONUS: Keep your books tidy
Financial statements let you monitor your business, find ways to trim the fat, and anticipate problems. Plus, you’ll need them if you decide to apply for a low interest loan, such as the Small Business Administration’s Paycheck Protection Program (PPP).
It’s easy to get overwhelmed. But as you face new challenges, be careful your regular day-to-day routine doesn’t slip. Falling behind on bookkeeping now could cost you important insights into how your business works, or limit your opportunities for funding down the line. Plus, even though tax season was delayed in 2020, the postponed filing date came around eventually. A good bookkeeper can help make sure you’re prepared.
Staff Writer, Bench Accounting