If you follow current events and listen to the news, you probably have heard the word “recession” thrown around quite a bit. Unfortunately, it’s a word we’re going to be well acquainted with as the health of the global economy continues to deteriorate.
Global markets are facing volatility thanks to the trade war between the two largest economies in the world, the United States and China.
Last month, U.S. stocks hit a low after President Trump vowed to retaliate against China’s latest tariffs. In fact, three-quarters of the economists at the National Association for Business Economics are predicting a recession. On the other side of the trade war, China has devalued its currency in a measure to offset tariffs imposed by the States and the Asian superpower faced its lowest industrial production growth in 17 years. It’s not just affecting the two nations embroiled in the trade war: the UK announced negative GDP growth for the past quarter and Germany announced its own shrinking GDP.
So what does all of this mean for the Canadian economy? What does it mean for Canadian business owners like you?
Canada’s economy is closely tied to that of the States and is reliant on global trade, but that doesn’t mean we should panic. The Canadian inflation rate held steady in August and Americans are still shopping, but with the negative headlines across the board about the sinking global economy, consumers are bound to hold their wallets a little tighter.
As a business owner, you’re focussed on day-to-day problems. You know that fluctuations in revenue are par for the course, but the effects of the global economy are a whole other thing you may not have considered. From tariffs on exports to reduced profits due to less consumer spending, your business may be affected by global events. To prepare your business for the possibility of an economic downturn, here are some tips that can help recession-proof your business:
Expand your client base
We’ve mentioned this in a past blog post before, but it’s worth emphasizing again: your business should not be reliant on just a few clients. If most of your income comes from a short list of people or businesses, you may not be ready to deal with the consequences if they look to reassess their business during an economic downturn.
Manage your cash flow
Managing your cash flow can make or break your business, so you should always keep an eye on cash flow red flags, but this is especially important during a recession. In particular, have your financial team keep a close eye on accounts receivables and payables. If you’re facing the effects of a recession, chances are that your clients are as well, and this may mean longer than expected payment terms (if they are able to pay at all.) You may also want to speak to your vendors and renegotiate terms – if they are willing to extend your payment terms or work out payment plans, you have some extra leverage when it comes to cash on hand during tough times.
Reassess your fixed and variable costs
While this is something that should be done on an ongoing basis, recession indicators should be a reminder to reassess your costs. Take a look at your fixed expenses and decide what is necessary and look at what is not. Even if there’s no reason to act on it, having a backup plan to manage your fixed expenses, like refinancing, can be an ace in the pocket if/when it’s needed. As for variable expenses, these are optional: don’t skimp on morale-boosting initiatives like birthday lunches, which can improve employee productivity, but instead avoid paying yourself your holiday bonus and keep the cash in the business.
Remember that cash is king
Hold onto your money. If you’ve been thinking of investing in a new piece of equipment for your business or if you had been eyeing that new office space down the block, put a pin in it. Having cash in the business will give you flexibility when a recession hits. It will also give you the option to jump on investment opportunities that arose out other businesses lack of recession planning.
No one likes strategizing with negativity in mind, but being prepared is the number one way to recession-proof your business. Even if the economists are wrong and the market stays steady, you’ll at least have taken the steps to protect your business against the tough times. While you shouldn’t be alarming that we’ll be facing a recession, you should have a plan just in case we do. Our team of accountants, tax specialists, and bookkeepers can provide you the financial advice you need to recession-proof your business. Just give us a call at 647-476-2145 or schedule an appointment.