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How to financially prepare your business for a future recession

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By Ami Kassar


Is a recession looming? That's a question you hear every day as the market careens down, soars back up, and then flutters again.

I'm not an economist, but you don't have to be one to see there are some potential warning signs staring us in the face. And any upper-level collegiate finance major has heard more than once how people tend to forget (especially after a lengthy bull market) that things always go in cycles.

In any case, if you think a recession is coming -- or even if you don't -- now's a good time to prepare for the inevitable rainy day. One of these days, there will be a recession.

If Cash Flow Is Tight

In poor economic times, financial liquidity is exceptionally important. In other words, it's the cash flow, stupid.

So, what can you do? A couple of things come to mind.

If you've accumulated some short-term debt, consider restructuring it by obtaining a 10-year Small Business Administration-backed loan that will decrease your monthly payments and give you added wiggle room. I've suggested numerous times that the SBA is a much-underused resource by entrepreneurs, so if there was ever a time to explore its options, now is that time.

In addition, now is the time to secure a line of credit, which can be more affordable than a straight loan because you only pay interest on it when you tap it. You may never use the line of credit -- and that's certainly fine -- but knowing you have available cash if something unexpected occurs will give you peace of mind. And if a recession does occur, lenders generally will tighten their standards and offer less favorable terms, so get in while you can.

As for the line itself, you should seek an amount that's equivalent to roughly 10 percent of your topline sales or 85 percent of accounts receivable or 50 percent of your inventory -- whichever is greater.

A beneficial side effect of restructuring loans or obtaining a credit line is the chance to further build your credit history and improve your credit rating.

If Cash Flow Is Good

If your cash flow is in good shape, consider a few other measures.

If this applies to your business, maintaining lean inventories may prove helpful. Analyze your inventory to see where savings can be made in terms of acquisitions, maintenance of said inventory, and tracking the items.

Diversification should be pursued as well. If you rely on a handful of major clients, the impact might be brutal if a couple of them run into problems of their own and suddenly scale back or stop their orders with you. Perhaps you can focus on different industries or promote other uses for your product.

Keep an extra-close eye on those clients by carefully managing invoices and payments; be on the lookout for clients whose payment habits change, and, early in the process, work with them to make sure you're still getting paid.

Finally, be careful about taking on new expenses. If you need to buy something, buy it, but if a purchase can wait, hold off until you get a feel for how a recession is impacting your business.

The original "How to Financially Prepare Your Business for a Future Recession" article can be seen here.

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