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Business Finance Management
June 10, 2022
When we hear the word ‘recession,’ we think of the Great Depression or the housing crisis of 2008. We think of a recession as a rarity that brings financial ruin for years to come. In reality, recessions in the United States happen every six years, with most lasting eleven months.
The rumblings of a nearing recession may have you wondering how to recession-proof your startup business. Below we’ll give you detailed information on protecting your business, employees, and financial state during a market downturn.
Regardless of your startup's niche, buttoned-up finances and revenue monitoring are key to maintaining a recession-proof business. Watch your company’s cash flow, accounts receivable, accounts payable, and income to ensure nothing goes over budget. Businesses that don’t have a tight grip on their finances suffer the most in and out of recessions.
Budgeting and structures for business are flexible, but founders sometimes forget this. They focus on constructing stalwart plans to ensure their business becomes profitable. However, companies that can adapt to the financial market are the ones that have a higher chance of keeping afloat.
Below are 9 ways to start recession-proofing your finances today.
During good times financial budgeting can slip through the cracks. Why worry about it when there’s no problem? This mindset is problematic for business owners regardless of market conditions. Economic downturns are inevitable, and having a strict budget can save your startup from substantial losses during a recession.
Creating a budget for your startup is vital. As a founder, you or a financial planner can create a realistic framework for long-term financial planning. These plans should include an added layer of cash flow padding for crucial times. Opening a corporate savings account with extra revenue is another viable option if you do not want to edit your budget.
Corporate credit cards offer an alternative way to pay for operating expenses. Operating costs take up a considerable portion of your budget. Multiple credit lines will give your budget breathing room if your business sees a dip in revenue due to the market.
Alternatively, credit lines explicitly reserved for emergencies can act as financial padding. Most founders consistently push extra revenue back into the business for expansions. If you cannot create a cash cushion, consider corporate credit cards.
Is there anything nonessential in your budget? Can you cut down employee spending? Looking at the nitty-gritty details in your budget is a tedious but beneficial task. Shrinking your startup budget down to the bare essentials gives you a transparent view of your bottom line.
It can be scary to think of operating on a skeleton budget, but it can be done successfully. Calculating the lowest cash balance possible before a shutdown doesn’t have to be fear-inducing. Use this number as a tool in your arsenal rather than a number to avoid. Trim your budget above your bottom line to cushion the fall if your revenue drops further than expected.
Investors are in for the long haul. They believe in your business and are there for financial help in planning and funding. Chances are lenders are already prepping for a recession. Speaking to investors before a recession increases the likelihood that you’ll secure financing.
Looking into business credit, business loans, and crowdfunding are all viable options for startups. Collect all necessary financial records now so you can hit the ground running. Set realistic expectations for the funding you’re looking for. Keep the conversation open and honest so that you and your lender can come to a mutually beneficial agreement, but expect lower valuations and total funding amounts.
Preparing your business for a recession is all about planning. Sticking to a budget is essential, but it may be necessary to look at financial remodeling. Reworking your business model doesn’t mean you have to start from scratch. Simply communicate with your financial advisor and accountant and set time to construct different ‘what ifs.’
Having a framework of solutions to problems that may arise can potentially erase revenue decrease. Keep your team on the same page, and communicate to address any concerns your financial team may have. Transparency is key.
Cancellations or pauses in SaaS services can diminish expected revenue. Ensuring customer satisfaction at all times reassures clients that they are essential to your business.
You may lose clients in a recession; it’s an unfortunate outcome which is why preparation is crucial. Instead of putting all of your efforts into gaining new clients, focus on retention and transparent relationships with current clients.
Offer feedback surveys, and send thank you emails when they renew subscriptions or upgrade their service. Invite them back with an incentive, if you’re able, or offer an alternative service if cost is their concern.
Small businesses and startups rely on close relationships during the early stages. There’s no reason to let this practice fall to the wayside.
Find new and creative ways to reach your target audience. The food service industry drastically changed its prospective pool of customers during the COVID-19 pandemic by shifting focus to delivery efforts. Businesses that previously had not offered delivery created new lines of income by partnering with delivery apps and expanding their services areas to reach more customers. These customers over time became loyal and continued ordering from their favorite restaurants long after lockdown restrictions lifted.
Airbnb took a similar approach by shifting its focus from short-term to long-term rentals. Their customer became the more affluent professional with high discretionary income who could find relief from stay-at-home orders by finding a long-term change of scenery. As restrictions lifted but work-from-home remained, Airbnb was able to retain these customers while picking back up focus on short-term travel again.
One thing to remember is that recessions are not everlasting. Tunnel vision marketing can drastically affect future revenue if you’re no longer offering a service needed outside of a recession. If your core offering remains on clients’ needs during a recession, your revenue will stagnate or drop significantly once the market steadies.
Good marketing affects conversion but cutting marketing altogether when your revenue goal is to maintain consistency over growth can be more beneficial. With lower spending rates during a recession, there is a high chance that marketing-fueled conversion will drop exponentially.
Track conversions pushed by current marketing campaigns in place, then change or make cuts to the unsuccessful campaigns. With this method, you’re preparing for plan adjustments in real-time. You can make cuts to specific marketing campaigns or pull a full stop on all marketing for the time being.
Proper bookkeeping and accounting make a difference. When all your financial information is in one organized place you can easily make budget adjustments for the following period. You can track where you’re overspending, seeing savings, and total revenue compared to the previous period.
At Zeni, we take pride in our innovative AI technology that syncs with the financial team we put in place for each client. Our financial advisors have over 100 years of experience in the industry. We offer bookkeeping, CFO, and accounting services for startups looking to reorganize and track their financial reports.