Sugarcoating the news won’t help—there is a possibility of another recession in the near future. All the main indicators for such an economic downturn are present and flashing their red warning lights. Dan North, Euler Hermes Chief Economist says, “There are a number of indicators we see which we really think could lead into a recession in the first half of 2020.”
But what are these indicators and what can you do to keep your company in business during a recession ? First, we’ll explore the key indicators of a recession and then we’ll arm you with some strategies to insulate your company from harm.
Key Recession Indicators:
- New home sales have dropped by 7.8%, an ominous portent of an oncoming recession (similar to how they dropped before the 1990 and 2001 recessions).
- The Federal Reserve lowered the overnight Fed Funds rate by 25 basis points (bps) from a range of 2%-2.25% to 1.75%-2%. These rate cuts take time to save businesses and consumers money, which puts fears into investors that a possible trade war will negatively affect everyone first. This prompts investors to switch their investing tactics, which has led to an Inverted Yield Curve. (Learn more about the September 2019 Fed rate cut in Dan North’s post on the topic.)
- An Inverted Yield Curve (when long-term yields drop below short-term yields) is another key indicator for an oncoming recession. In fact, it has preceded and predicted the last 7 recessions. This third harbinger of things to come is one of the many reasons our “Risky Business Survey” reported 58% of CFOs didn’t feel fully prepared to handle the current risk landscape.
Learn the A/R risks keeping CFOs up at night.
Download the Risky Business Survey Report now!
Prepare Your Business For A Recession
It doesn’t help to know of something dark approaching and not prepare some light. Here are eight strategies you can implement now to better ready your company to face the future recession.
1. Build a cash reserve
The recommended supply of cash you should have reserved varies depending on who you ask, but the average suggested amount is between 6-12 months of operating expenses. There’s one wrinkle to this: Money just sitting in a bank and not working for your company is a wasted resource. You’ll have to do some careful balancing to make sure your money is in the best place for your company.
Trade credit insurance from Euler Hermes can help tip the scales in your favor by securing your accounts receivables, making cash flow forecasting easier.
2. Safeguard your cash flow
Cash will always be flowing out of your business, never fear about that, so you need to secure and protect the cash coming in to your business. Communicate often and clearly with those companies who owe you money. Make sure they are used to your billing patterns and practices. Remember, they will also face hard times when the recession hits (and might even be reading these tips, too)—weather the storm together. Remind them of how important they are to your business and vice versa. Become indispensable, so when they pick which bills to pay first, your company’s invoices are always on top of the stack.
You can also maximize your cash conversion cycle by reducing Days Sales Outstanding, offering your customers early payment discounts and providing good collections practices. One customer defaulting on an invoice can be devastating, especially in a recession. Euler Hermes’ trade credit insurance makes sure you get paid even if there is a nonpayment, which reduces the impact of a bad debt on your cash flow and profitability. For more tips on this topic, read the related article, How to Avoid Non-Payment from Customers.
3. Establish your creditworthiness
Always make sure your payments to creditors are on time. In fact, be early if you can and pay off your debt if possible. This will give your business a favorable behavior score. As Laura Faulkner, VP of Marketing for Credit One Bank, points out, “Most banks use a behavior score when making credit line decisions….”
Once you have a good behavior score, it’s time to push creditors for longer terms (net30 or more), discounted terms (2/10, net30 – where you save a percentage if you pay early), and even larger lines of credit. Renegotiating credit terms before there’s an economic event is the best way to be prepared when things get rocky. With Euler Hermes protecting your incoming cash flow, staying on top of payments to your creditors is easier than ever.
4. Examine and evaluate operating costs
Reduce your expenses but do so smartly. Renegotiate the lease for your office space, find less expensive office supplies, and reevaluate the services your business really needs to survive. Trade credit insurance is a very cost-effective way to insulate your business from the destructive winds of recession. It normally costs only a fraction of a percentage of the amount insured.
And finally, examine your staff. If any employees need to leave, make that happen before a recession, not during. Make sure any layoffs are done with lots of thought—you don’t want to damage company morale or shrink your staff so much you won’t be able to properly provide for your customers.
5. If you have inventory, manage it carefully
Just like your staff, you want to have just the right amount of inventory to serve your customers. If you can, talk to your suppliers and create a plan to ensure more inventory turns so your inventory never stagnates. If you’ve spoken to them about credit terms and made plans regarding inventory, your suppliers will see how dedicated and prepared you are to succeed.
If for any reason your suppliers are unwilling to work with you, Euler Hermes helps you have options. We can offer credit terms to new customers or higher credit lines to current customers, which can help increase your inventory turnover ratio. Read how KEEN partnered with Euler Hermes to mitigate risk without any interruption in inventory.
6. Secure financing before you need it
Having a good relationship with your current (and possible future) lenders is an important step in supporting your working capital needs. These relationships also provide your company flexibility to weather any economic turbulence or capitalize on advantageous opportunities. Ensuring your banker knows your company well and believes in your strategy is key.
As Entrepreneurs’ Organization states, “The best time to look for capital is when you don’t need the money.” Euler Hermes’ trade credit insurance can help you get additional financing capacity by including insured receivables in your borrowing base.
7. Never stop marketing
You might guess one way to conserve expenses is to cut back on your marketing budget. But stop and think: How will new customers know about your company and services if you stop advertising? Continuing your advertising through adverse times projects your company as a true leader, teaches your current customers they are in good hands, and gives new companies confidence to do business with you. The return on investment to your cash flow will be brilliant.
One place to expand your business is internationally, especially if international markets are outside of the recession blast zone. Euler Hermes provides credit analysis and protection on companies all over the world, which can make stepping out on the global stage much easier. View our Country Risk Reports to plan and manage international trade.
8. Find trusted partners
By taking the steps above, you’ll find which companies out there want to work with you and which just want to take your money and services. You’ll also discover who will weather the recession alongside you, and who will drown.
Euler Hermes is here to be not only your life raft, but also your cruise director. By providing protection from unpaid invoices, offering credit evaluation assistance, and giving guidance to help you expand your business into new markets and areas of the world, Euler Hermes is ready to help your business succeed, even through a recession. Click here to contact us today.
Euler Hermes Has Tools to Help Grow Your Business During a Recession
The good thing about preparing your business to weather a recession is it will put your company in a better place, full stop. You will be better prepared to come out the other end of adversity soaring over your competition.
We’ve prepared the Past Due Survival Kit to help you better prepare for a recession, knowing that unpaid invoices could become a growing pain point. Download your kit now.
You can also watch our on-demand webinar to learn more about the economic indicators pointing to a recession and signs to watch more that warn you customer non-payment could soon be an issue.