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Many businesses were forced to shutter their doors due to the COVID-19 pandemic and the toll that the closure had on the economy as a whole. And while there has been a boom since businesses have been able to reopen to full capacity, economists are saying this isn’t going to last forever. In fact, many experts are expecting a crash sooner rather than later, and the effects of this recession might last longer than those caused by the pandemic.

However, what can businesses do to avoid the same level of devastation? Some protections were implemented to combat the unprecedented circumstances of a global pandemic, but the chances of this relief being provided to businesses again are slim. As a result, it is up to businesses to prepare for the inevitable decline so that they don’t find themselves in a position where they would need relief not to fail.

At this point, the best thing that business owners can do is to start preserving cash - or at least prepare a battle plan to do so. Cut costs now and, if necessary, raise funds while you are able so that you can build the runway your business will need in an economic recession. Once the recession hits, it will be more difficult and expensive to receive funding — if you can even find someone to provide it. If you foresee having a potential need shortly, you should take advantage of the rates and availability while you still can.
 

How to preserve cash

The first step in effectively preserving cash is to build a detailed monthly budget. Knowing how much and where your business will need to spend to survive will give you a better understanding of your company’s overall financial health and how you can adjust your spending to ensure you make it through the recession.

Understanding your cash flow is a big part of your success amidst a recession. In a recession, your income will likely go down as well. Your customers and clients are likely suffering in the same ways as you, so they won’t have as much money to spend. Spending more than your company is reasonably able to afford is what will push your company towards failure.

However, even though recessions are inherently unpredictable, there are ways for you to forecast your income — even in uncertain times. Leading indicators like your pipeline and bookings can give you a solid idea of how much business you can expect in the recession. If these leading indicators are tracking downwardly, you know you will have to cut costs even further than you already are.

Conducting a variance analysis can also help you make up for some of the shortcomings of this forecast. Naturally, things aren’t going to go exactly according to plan, and variance analysis lets you know how to address and respond to those fluctuations. Knowing how your company’s cash flow can fluctuate monthly will allow you to prepare for the worst-case scenario.
 

Not all effects of the impending recession will be negative

But a recession doesn’t necessarily mean doom for businesses. If your business is struggling financially, but your bones are solid — say you have an extraordinary team in place or offer some desirable technology to the market — these circumstances may be the optimal ones for a strategic merger or acquisition.

And if your company is in good shape during a recession, you can focus your money and efforts on research and development. R&D is the department where most businesses are going to have to cut costs during the recession. If the goal is to sustain, the focus should be on successful existing products and services, not developing new ones. However, if you’re one of those lucky companies in the position to continue growth, you can stand out with continued investment in research and development.

A recession is also a great time to be proactive. Know that many other businesses are going through the same thing as you, and this can be an opportunity to build relationships and set targets for the future. These strategies can give you pivotal opportunities in the future once the economy recovers, allowing you to thrive and recover.

Choosing to preserve cash is a hard one, especially in a time that is perceived to be relatively stable, but it is crucial to prepare for the downturn that is coming soon. Understanding the cash coming in and out of your enterprise and where you can cut costs when necessary will allow you to sustain yourself through these challenging times.