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Preparing a Service-Based Business for Recession

Updated: Aug 26, 2022

Recessions are a natural part of the economic cycle and are unavoidable. On average, they typically last about a year but can cause significant harm to an unprepared business. During a recession, typically, unemployment rates increase, profit margins weaken, and credit is challenging to obtain. Service-based companies usually suffer the most during a recession as they commonly start seeing delays in payments from their clients, have a loss in clientele, and struggle to acquire new business. Here are a few pointers to help your business survive:

Keep Enough Cash on Hand

Leveraging cash is essential for you to ensure you are prepared for a recession. In addition, ensuring you have an adequate amount of cash available assures that your business has more financial security, so you can cover your expenses during months you experience cash flow issues.

A good rule of thumb is to have a minimum of 15% of your average annual revenue in cash. The higher the percentage you have at hand, the more expenses you will be able to cover if you run into cash flow problems. If you struggle with having cash on hand, it is recommended that you reassess your current business model. This issue often indicates a problem with a business's profit margin, which should be roughly 15 to 20 percent of your total revenue.

Obtain a Line of Credit

Securing a line of credit can be a strong defense during a recession, as it can help you cover your expenses during the most challenging months. If you already have a line of credit, it is highly recommended that you extend it. It is recommended that your line of credit is equal to your cash reserve (which is roughly 20 to 25 percent of your current sales). Extending your credit line can allow you to cover even more costs if you run into cash flow problems.

Identify Inefficiencies in Operations

Making beneficial improvements to your current operations procedures can help your business run as efficiently as possible during a recession. Lean operations are key when you have fewer resources to run your business and earn income. This can make a significant impact during a recession when money to cover expenses is scarce.

Some of these changes can include tightening your accounts receivable timeline or reducing your response time regarding your sales cycle. These small changes can significantly impact generating income and ensuring that your payments are received promptly during a recession.

Following these recommended pointers increases your business's chances of surviving a recession.

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