How to Manage Your Company’s Finances during Economic Crisis

Editor's Note: Take a look at our featured best practice, Business Continuity Planning - Guide, Process and Tools (61-slide PowerPoint presentation). The disruption COVID-19 caused has made businesses more aware of the importance of business continuity planning (BCP) for effective disruption-related preparation, response and recovery. Although the term "business continuity" is often used as a synonym for IT Disaster recovery [read more]

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Running a business is not a walk in the park, but having to manage it during a crisis, takes it to another level. Unfortunately, recessions are inevitable, and sooner or later, every manager has to face one. And as the COVID-19 pandemic showed us, for many, that task is too overwhelming.

And sure, it’s a situation we’ve never experienced before. Moreover, it came so unexpectedly that it’s no surprise many companies don’t know how to deal with it. What’s worse, we can’t precisely predict how long this recession will stay with us.

That’s why learning how to handle your company’s finances in a situation like this is absolutely crucial. If you’d like to find out more, keep reading. Below you’ll find a guide on how to take care of your business’ financial condition properly.

Evaluate Your Finances

To create an efficient crisis management strategy, the first thing you need to do is evaluate your company’s finances. Ensuring your cash flow is on the right level is crucial during an economic downturn. Here’s a four-step checklist to help you manage your finances during a recession, including implementing finance automation where applicable.

Implementing them is the first step to ensuring your company makes it through the economic recession.

Manage Your Spendings

Taking care of your spendings is crucial if you want to make sure your company makes it through a crisis. Keep in mind, though, that finding ways to save money can be more challenging than it sounds, and has to be done extremely carefully. You can’t just cut back on financing random things and operations.

The best idea is to look at your finances and see how much the recession impacts them. For example, the COVID-19 pandemic has forced many companies to work remotely, meaning their offices have been out of use since March.

This allows businesses to save money on workplace-related costs, like electricity bills. On the other hand, it also means that redundancies have to be made, as some jobs are no longer needed.

For example, if you have a receptionist, you can save money and consider using a virtual assistant. If you’re not convinced, check out answering service pricing and see for yourself. 

Extend Payables

One of the best ways to maintain your working capital is to extend some of your short term payables. Of course, you can’t simply tell your vendors unexpectedly that you’re not going to pay them in time. Doing that would ruin your relations and, in the long run, cost you a fortune.

To prevent that from happening, it’s best to sit down together and talk it out. Once you come to a mutual agreement, you can decide how it’s going to look like. Maybe your providers would accept you paying them in installments.

Or maybe they will delay your commitments, allowing you to pay them back after your company stands back on its feet. No matter the plan you agree to, make sure to establish an agreement that you’re all going to be okay with, without ruining your cash flow.

Review Your Product Portfolio

The main problem with any economic downturn is that it completely changes the market’s supply and demand. Because of that, some services and products become unprofitable. If you need an example, look at what the pandemic has done to the tourism and event industry.

That’s why, if you want to ensure you won’t lose money and resources on unnecessary investments, reviewing your product/service portfolio is crucial. It will allow you to determine what you should do to help your business retain sufficient cash flow.

In a nutshell, you should read your financial reports and see how you can adjust your products and services to the market situation.

The same goes for the scale of your operations. For example, if you operate internationally, you might consider focusing more on your domestic market, searching for an alternative revenue source.

Understand Your Insurance

The rule is simple; without insurance, your business won’t prevail. Having one is your first defense line when a financial crisis hits and will allow your company to survive the first blow without losing too much money.

However, if you want to ensure you get the compensation you deserve, you need to understand how your business interruption insurance works. For example, the coverage may vary depending on the provider, type of insurance, location, and the industry you’re in.

What’s more, many companies have started to include exclusions for losses caused by the coronavirus pandemic. To ensure it won’t harm your venture, you must stay updated and understand how your insurance works.

Develop Various Scenarios

Every financial crisis is unique and hits various industries and markets differently. That makes it hard to predict the outcome, forcing you to create multiple scenarios of how the recession will develop, when it’s going to end, and how you can adjust your business to the current market situation.

As a finance leader, the best idea is to create three main scenarios – optimistic, neutral, and pessimistic. Doing that will help you develop a more efficient plan for dealing with the downturn.

Every scenario should include your every supply chain’s potential condition, the value of interest rates, your financial situation, the state of the economy, new investment opportunities, etc.

What’s more, if you want to ensure you create an efficient set of tools, you have to monitor the current situation. Doing that will allow you to react as soon as something happens, lowering the risk of failure.

Also, don’t forget to review your plan to determine how you can increase your planning quality and efficiency. You never know when the next downturn will hit the economy, so it’s best to have at least the knowledge necessary for keeping your company safe in a time of trouble.

Stabilize Your Business

As soon as you handle your company’s financial situation, create scenarios, and prepare decent recovery plans, it’s time to stabilize your business. As a fearless leader, you have to show your team that you know how to deal with your current situation.

The stabilization process should include bolstering productivity and reevaluating investments.

Bolstering Productivity and Morale

The morale in your team during a recession is very likely to decrease, negatively impacting productivity. That can cause your business to underperform and fail to survive in a hostile economic environment.

If you’re starting to notice the signs of a decrease in productivity, it’s up to you as a leader to stand up to the challenge and show your employees that they can believe you. And sure, it’s easier said than done, but there are some things you can implement to boost your team’s morale.

The first rule is to be confident and transparent. Your employees have to see that you’re not afraid and have a plan on how to ensure your company survives.

Secondly, set realistic goals. Your workers have to see that they can meet your expectations without the fear of failure. Also, be flexible and show them that they can come to you when they encounter a problem.

The third thing is to show your employees their value for your company. It can be tricky since you probably can’t afford to pay them more, but ensuring they get their well-deserved raises as soon as the business stands back on its feet does sound like a good idea.

Reevaluating Investment Opportunities

If you believe that you’ve managed to survive the first blow and taken proper care of your current financial situation, it’s time to take a closer look at your future opportunities. That’s the moment when your developed scenarios may come in handy.

Take a look at different outcomes, and plan how you intend to strengthen your balance sheet. Your planning should include reducing inventory or refinancing debt. Doing that will help you extend your business’s financial flexibility and make your financial management more effective.

Bottom Line

Managing your business through a recession is exceptionally challenging. Unfortunately, downturns are an integral part of the economic cycle, and every entrepreneur will have to face it at one point in their career. That’s why creating an efficient risk management strategy is a must.

Still, there are certain situations you can’t predict, just like the coronavirus pandemic. But it’s in a time like that when you can show the world what a great manager you are and steer your company to the haven despite the odds.

Implementing the elements mentioned above should help you achieve that goal. Keep in mind that maintaining cash flow is crucial if you want to make it through the crisis. That’s why you should make taking care of your financial situation your top priority.

Keep in mind that the state of your finances influences the whole organization, and if you can’t keep it on the right level, you’ll join the group of companies that failed.

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