Are you financially prepared for an economic downturn? The business cycle is called a cycle for a reason–highs and lows are normal and expected. I hope we aren’t going to talk ourselves into a recession. But clearly, we won’t continue with the sort of GDP growth that we’ve enjoyed over the last decade.
Success certainly should never lead to complacency. So how can you as a business owner or leader make sure you are preparing for a potential downturn in the future?
Here are 4 questions to consider when preparing for an economic downturn:
Do you have a cash reserve or an emergency fund for your business?A good cash reserve may include 6 months of operating expenses and 6 months of payroll expenses. The cash reserve would look different for different industries, and you may not be able to have that amount of run rate. But I believe that’s the mindset that you ought to have.
Are you too dependent on too few resources?How dependent are you on a particular customer, a specific employee, a specific machine, or a particular part of your process? I think those are things that are very important to diversify so that you reduce your dependence on any particular component.
Do you have a plan for if you lost a large percentage of your business quickly?If you woke up today and you lost 10% of your business, what would you do? If you lost 25% of your business, what would you do? I think even going through that mental exercise and writing it down is essential for you to prepare for those things if and when they are to occur.
Are you actively reducing debt?Are you personally in a position where you are reducing your debt and/or reducing your dependence on outside funding? If you do have liabilities that can’t be eliminated in the short term, do you have a fixed interest rate? Or do you have a low-interest rate, as low as you can get?
ConclusionPrudent organizational leaders hope for the best and plan for the worst. The last thing you want to do is be surprised when that inevitable downturn occurs. And the efforts that you put in beforehand are going to serve you well when the time comes.