Looking forward to 2024, an uncertain economy has made many business leaders nervous. In the event of a recession, having cash reserves available and clamping down on expenses become top of mind.
Rather than cutting expenses willy-nilly or avoiding all risk, there are basic practices you can put in place now. Doing so can put your business in a good place to weather the storm on the off chance that economic disaster strikes.
1. Look for outsourcing opportunities
The choice of whether to outsource certain business functions is a balancing act. Both outsourcing work and keeping it in-house have pros and cons in terms of cost, control and compliance, depending on the function in question. If you have a default policy in either direction, you run the risk of leaving money on the table. For each vital business function, you should analyze whether outsourcing makes sense on a regular basis.
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Even if it’s financially advantageous to keep functions in-house now, that might not always be the case. To pivot quickly in the event of an economic downturn, it’s good to identify options for outsourcing ahead of time. That way, if you have to let employees go or experience a drastic drop in revenue, you’re not frantically hunting for contractors. Also, having conducted the preliminary legwork, you will already have a basic idea of the cost range you might be in for.
2. Maintain an emergency fund
There is always the possibility that your business will go through a slump. Maybe a significant portion of your revenue comes from a single client. If you were to lose that client, it would likely take some time to rebuild your monthly income. Without an adequate emergency fund, you could find yourself having to make some hard choices. That might involve laying off high-quality employees who will be hard to replace when business picks up again.
Now, there are some business owners who are reluctant to maintain large cash reserves. The biggest argument against cash reserves is the idea that money sitting in the bank isn’t forwarding the business. Luckily, cash in your bank account won’t just be doing nothing, thanks mainly to current interest rates. You can find money market accounts with interest rates at 5% or even higher. So even if there are more interesting things you’d like to do with your cash reserve, keeping that responsible sum in the bank can still generate something.
So how much should you have in your emergency fund? That will vary greatly from business to business, but there are some starting points to work with. It’s typically recommended to maintain enough of a cash reserve to pay essential expenses and employee salaries for nine to 12 months. This calculation assumes your monthly revenue goes down to zero. While that scenario seems unlikely, the COVID-19 pandemic proved that it’s not impossible.
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3. Regularly check recurring transactions
Sometimes the things that eat into your bank account the most aren’t large purchases. Sure, those are the most dramatic to see come through on the daily transaction reports. However, small amounts that fly under the radar can add up in a big way over time.
While keeping an eye on little transactions can keep expenses low, it’s important to do so before you get into financial trouble. A great way to do that is to have a quarterly or semiannual recurring transaction review.
Recurring payments often come through every month without someone matching the amount to an invoice and manually initiating a payment. Subscription fees are especially important to review. I don’t know how many times I’ve seen companies spend hundreds of dollars each month on subscriptions that aren’t being used. If you have 10 employees but 18 subscriptions to the same SaaS tool coming through every month, something is wrong. What is likely happening is that employees are leaving, but nobody is canceling their subscriptions.
What you do now can save you later
Whether you’re currently seeing a dip in revenue or are fearful of one in the future, a well-cushioned bank account is vital. Without it, you might find it’s too late to make impactful changes if your industry goes sour. So be mindful of cost-effective practices and set yourself up to quickly pivot to cost-saving measures if need be.
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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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