When the “R” word rears its ugly head.
When the “R” word rears its ugly head.
—Thursday, Nov 17th 2022 —
It’s no secret that the “R” word aka RECESSION is looming. Maintaining tight control over both our fixed and variable expenses will be an essential part of maximizing cash flow and maintaining acceptable future margins in our businesses.
There are a variety of tactics we can employ to rein in expenses and prepare for unforeseen costs that crop up over the course of 2023 and beyond.
In past Insights we’ve touched on the CASH FLOW subject and what it all entails.
To recap cash flow measures how much cash a company takes in versus how much it expends. More cash coming in than going out means the cash flow is positive. If the opposite is true, the cash flow is negative.
A business is considered healthy when its cash flow is positive for a prolonged period of time. Even the best managed businesses during a recession will most likely experience short periods of negative cash flow. This is normal and to be expected, however remember that when a business has a negative cash flow for an extended period of time, it can over time run deep into its line of credit. With interest rates rising quickly the burden of debt could also continue to grow.
This vicious circle is usually how many small businesses are overwhelmed and slowly but surely become insolvent and may need to downsize dramatically or even shut down operations altogether.
That’s why it’s always good business to prepare for a potential recession.
Make a RECESSION plan
A well thought-out road map for 2023 is essential to properly forecast expenses and provide for contingencies.
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Track expenses diligently
A good way to do this is to compare your historic costs at a minimum once every month. This requires gathering data in an effective and efficient way.
Tracking your costs shouldn’t be an afterthought, it needs to be an integral part of your ongoing operations.
Benchmark against your data
Establish metrics that are meaningful to your business and comparable. If you see you’re spending more in certain categories, then drill down, investigate why and take appropriate action to reduce those costs to industry norms.
Actively Manage variable costs
Look at your company’s past variable expenses and calculate what percentage of sales they represent. Historic percentages provide both a good indicator of potential future costs and a benchmark to use in keeping those costs in line.
Get accurate on fixed costs
We all tend to become complacent about fixed costs because they are generally recurrent and often reflect long-standing pricelists.
In conclusion there’s no such thing as being overly prepared when the “R” word rears its ugly head.
Overall cash flow\expense management comes in three R’s: Research, Review and Respond.
It basically boils down to careful planning (research), making tweaks and adjustments as they’re needed (review) and rolling up our sleeves to do the necessary and ongoing hard work to achieve the plan (respond) before the $h!t hits the fan if you know what I mean.
Let’s do this
SsF
✅ CEO of cdrg+RedTeam™ | ✅ My mission is to be the "Diversified Entrepreneur"🚀. 3rd Gen. Entrepreneur | Rebuilding Environments by Design since 1955 🚀
9moOver a year ago... I wrote this a blog on "Is your business prepared for a potential recession?" Fast forward to today and wow I'm glad we "practised what we preached". While short periods of negative cash flow are normal, it's important to keep an eye on prolonged negative cash flow. With continued high interest rates, debt can quickly become overwhelming and lead to downsizing or even shutting down operations altogether. Remember, a healthy business maintains positive cash flow for a prolonged period of time. It's critical to take proactive steps now to prepare for the future and ensure your business's long-term success and resilience. Let's do this! SsF #business #recessionpreparedness #cashflow #financialplanning
Consultant at Business Mentors
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