Preparing your business for a recession helps reduce financial risks.
Between inflation and instability in the job market, many economists believe a recession is inevitable in 2023. Current economic conditions are already affecting each industry differently. In times of uncertainty, BCH is here to help your business stand prepared.
Since the global pandemic, it might feel like the U.S. economy is sending mixed signals. While some sources claim we are already in a recession, others believe the worst is yet to come.
According to “New York Magazine”, “forecasters surveyed by ‘The Wall Street Journal’ in October put the probability of a U.S. recession next year at about 63 percent. Some analysts, like those at asset manager Vanguard, say that a 2023 recession is all but certain.”
Analysts at S&P Global “expect a mild recession will begin early next year with the subsequent recovery to begin in the second half of 2023.”
While recessions are difficult to predict and impossible to prevent, there are strategies that can help you reduce financial risks and safeguard your assets in the event of an economic downturn.
What is an Economic Recession?
An economic recession is a period of reduced economic activity or negative growth in the market value of goods and services over multiple successive quarters.
The long-term results of a recession often include increased unemployment rates and decreased demand for goods and services. Such outcomes can present unique challenges and economic hardships for companies and organizations. There are several steps you can take to reduce recession-related risks and prevent losses from negatively affecting your business.
Recession Risks and Employment Challenges
First, businesses should anticipate the risks that come with an economic downturn and take certain steps to prepare for a recession. It’s also important to understand the factors contributing to a nationwide recession and consider the impact it could have on your business.
As interest rates increase and consumer demand decreases, employers tend to cut back on wages to save money. Unfortunately, cutting back on employment costs and benefits can result in higher turnover rates and fluctuations in the labor market.
“At 3.7 percent, the nation’s unemployment rate remains near historic lows [and] the annualized inflation rate now sits at 7.1 percent,” ”New York Magazine” reported.
Cutting back on overhead costs can help companies increase cash flow during a recession, but employment challenges can be detrimental to operations and client relations. Customers and clients expect consistent and reliable service, so businesses should ensure certain budget cuts are ultimately beneficial in the long run.
Managing Financial Risks and Cash Flow During a Recession
It’s important to mitigate financial risks and increase cash flows as much as possible during an economic downturn. Because every company operates differently, an important first step is to take time to understand where your risks and savings opportunities lie. Here are a few tips to protect your finances during a recession.
- Create a Financial Plan — An economic downturn can negatively affect an organization’s incoming revenue and quarterly profits. Keeping up with market trends and reports is a good way to stay up to date on industry news and economic events. Adjusting business practices and operations can eliminate unnecessary spending and help you focus on investment priorities.
- Prioritize Cash Flow and Savings — Certain industries offer financing options for large purchases or installment payments over time. In the event of a recession, lower installments or missed payments can put liquidity at risk. Limiting excess inventory, reducing overhead expenses and encouraging up-front or early payment options can help businesses maintain a steady cash flow.
- Managing Debt — Interest rates tend to increase before a recession to counteract inflation and consumer spending habits. When companies have multiple loans or large outstanding balances, business leaders are inclined to eliminate that debt as soon as possible. Paying off all debts at once can diminish your savings, so it’s best to prioritize high-interest-rate loans and review potential costs before taking on new debts.
Recessions impact every business differently, especially in today’s market. Talking to financial advisors and risk experts can help you determine an effective risk management strategy and create a financial plan that protects your company’s bottom line.
Maintaining Communication in a Recession
During times of uncertainty, communication is key. This is true when it comes to your employees, customers, vendors and stakeholders. Because recessions impact several parties, it’s best to keep them up to speed on any changes that may affect them.
- Transparency — Keep interested parties informed of new business strategies and financial changes during a recession. This gives stakeholders the chance to share ideas to aid with financial stability and help them understand the reasoning behind certain updates.
- Flexibility — Finding innovative ways to adapt to changes in the industry or economy can help your business be successful despite unique challenges. Improving online sales platforms or offering new services is a great way to create value.
- Marketing— Brand messaging and communication are especially important in times of financial uncertainty. Creative marketing techniques help attract new customers and keep profits up during times of economic instability.
- Relations — Connecting with customers, partners and vendors can make a huge difference in the event of an economic downturn. When customers trust your company, they are more likely to stay loyal and refer new business to your organization.
Being transparent and communicative can help you maintain a loyal customer base and reliable business partners. After all, individuals and organizations are more likely to conduct business with you when they feel valued and understand your intentions.
Mitigating Fraud and Cybersecurity Risks
When the economy takes a turn, insurance premiums and coverages are subject to changes during the renewal period. Even with rate increases, it’s important to maintain adequate coverage to protect your business during a recession.
- Cyber Insurance — When the economy hits a rough patch, businesses often search for ways to lower overhead costs. This is especially true when premiums are on the rise. Cutting certain coverages, however, can leave areas vulnerable to criminal activity. Businesses should be wary of cutting back on cyber insurance because cyberattacks can be financially detrimental. Remember, cybercriminals often target small- to mid-size companies that may not have the budget for protective software or IT personnel.
- Fraud Insurance — Occupation and unemployment fraud tends to increase during recessions because criminals and past employees are impacted by economic hardship. Additionally, company layoffs — especially in HR and IT departments — can put added stress on current team members who are the first to spot malicious activity.
Economic hardship has a tendency to increase online criminal activity and theft. That’s why it’s even more important to safeguard your company’s assets and avoid compromising financial situations. Check out the BCH blog for more information about cybersecurity risks and fraud prevention.
When it comes time to review your business insurance policies, maintaining adequate coverage for employee benefits and general liability should be a top priority. Cutting back on overhead expenses can be a challenge, so BCH is here to help you determine the best way to protect your business without putting your company at risk. Contact our benefit and risk advisors to find the best policies and strategies for your business when it matters.