Is the recession coming? How severe will it be? What impact will it have on your company?

Nobody knows the answers to those questions yet, but that does not mean you cannot prepare. Recessions are scary, but experienced CFOs have a time-tested playbook for navigating downturns. Here are the key strategies you should perform this summer to prepare your business for a recession.

Forecast multiple recession scenarios.

Before a recession begins, you should prepare by forecasting multiple recession scenarios. Forecasting gives Fractional CFOs insight into cash impact, timing, and the extent to which your organization needs to adapt cost structures to recessions. Use your strategic business forecast to plan situations such as:

  • Minor recession causing a 20% drop in demand
  • Major recession causing a 50% drop in demand
  • Shortages driving a 25% increase in costs
  • A key supplier is going out of business, causing a sudden shortage of raw materials

The impact of each event will be different for your business based on your model, working capital structure, contract length, and other factors. Experiment with different expense management and headcount reduction options to determine the appropriate response to each scenario.  

Focus on sales leading indicators.

The top of your sales funnel will be the first to detect a drop in demand, so pay extra attention to KPIs like:

  • Website visits 
  • Meetings booked
  • Leads gathered
  • Advertisement clicks

Be paranoid about drops in funnel volume. Meet with your sales team to determine if volume decreases are early recession indicators or something more mundane like seasonality. Remember that salespeople are naturally optimistic, which can lead to burying heads in the sand. You should be overly pessimistic to compensate.

Rein in cash.

The company with cash wins the recession. Here are the quick cash levers most companies can pull:

  • Pull in aging AR through aggressive collections.
  • Push out AP without straining key vendor relationships.
  • Lock in any debt or equity capital that may be pending. 
  • Pre-sell products through annual contracts, warranties, or bulk discounts 
  • Suspend major capital investments

Proactively cut under-performing resources.

Under-performing people, products, and processes bring down the organization in good times or bad, so pre-recession or early-recession is a great time to trim the fat. Collaborate with your team to identify and cut: 

  • Under-performing staff
  • Low-margin product lines
  • Slow-turning inventory to be fire-sold
  • Inefficient administrative processes which can be outsourced or automated

Delaying such cuts until cash is short will create distress and require more drastic reductions in force later, so be proactive and act now. At the same time, take positive measures to retain good employees. Check out my prior article on how to retain employees without increasing pay

Diversify sales towards recession-proof customers.

Government contracts and grant programs are generally recession-proof customers. Other consumer businesses see growth during recessions by focusing on thrifty alternative products. Check out our recent article on what business does well in a recession to learn how you can pivot your company to match the macroeconomy.

Collaborate with your team.

No one person can understand the quickly changing world of a recession. Collaborate with your sales team, managers, advisors, and financial professionals at every step of the journey to keep your perspective fresh and complete.