Small businesses need to have risk management and mitigation strategies as part of their business plan. Any number of factors can cause a financial emergency, as the COVID-19 pandemic has proven, and it can be challenging to keep a small business alive during these times. In today’s landscape, where some people say that a recession is already here, this is especially relevant. There is no set playbook to follow when times get rough since different companies across different industries carry their risks and rewards.
However, there are certain business strategies that business owners can adopt to make sure that they can avoid financial crises. This requires meticulous planning and an understanding of how the market works. Here is our guide for small businesses to steer clear of financial emergencies.
Always have a plan in place
It is imperative to have a financial plan for your business because this helps you to understand your income and expenses. This will help you have a record of your investments, cash reserves, expenses and savings. With a plan like this in place, your business will have clearly defined goals which will allow you to invest your money wisely. This is the first step towards preparing yourself for the onslaught of an economic crisis.
Go over your finances frequently
One of the best ways you can stay afloat during a financial crisis is by only covering your essential costs and not spending on extras. For this, it is necessary to list down your essential requirements as well as the budget you need for them. Sticking to a budget is a critical component of financial risk management for small businesses. It is all about trying to find the balance between staying within your budget and coming up with innovative ways to market your products and services.
It is also critical to maintain your financial records so that you can reduce the chances of any financial mishap during times of crisis. Small habits such as organizing your records correctly and neatly, and making a note of who owes you money and how much you have borrowed from investors will be very helpful in the long run. Moreover, this will give you a thorough idea about your company’s financial standing, so you will be in a better position to access whether you will be able to make it through periods of recession.
Reduce overhead expenses
Overhead expenses might not seem like a lot initially, but they can add up to be one of the biggest reasons why your business consistently fails to stick to a budget. In times of financial crisis, it is important to reduce overhead expenses as much as possible. For example, hiring freelancers instead of full-time employees can be a way to reduce costs during troubled times.
Always have an emergency fund
Any extra cash that your business makes should ideally be invested in some form of cash reserve which will act as an emergency fund during difficult times. Savings will carry forward your company during these times, which is why it is very important to always have enough emergency expenses. For example, consider saving any extra profit instead of reinvesting the amount or sharing it as a dividend among shareholders.
Make sure your income channels are protected
By using unit economics, it is important to find out which income channels are the most important for your business. Once they are identified, you should strive to protect these channels and secure the profits generated by them. This might sound easy, but it would involve taking a lot of strategic business decisions, such as adjusting your business model, cutting down on products that do not generate enough revenue, or optimizing pricing models.
Pay attention to your customers
Many businesses tend to lose sight of their customers during times of financial distress, when other things may take precedence. Nevertheless, you must never take from your customers since they are the lifeline of every business. Do not compromise on the quality of your products and your services even during financial emergencies. You may want to save on costs by doing so, but this strategy could backfire and you may end up losing customers. This will lead to a drop in sales, which can be deadly for your business, especially during bad times. Losing your customers can have an irreparable impact on your business, which may take years to recover from.
Consider debt management and new financing carefully
It can be a tempting idea to pay off your debts so that you can start on a clean slate. However, this can affect your cash reserves, which can leave you in a fix if you experience financial issues down the road. Instead of paying off all your debts, assess which ones you pay the highest interest for, and start by paying off those first.
During a financial crisis, you may also want to consider newer financing options. Secured business loans, for example, can be one way to go about this, since these have a longer repayment period. This will help your business particularly if you face seasonal cash flow issues. Having an established line of credit will help you sail through these tough times.
However, before taking on additional debt, it is important to first assess the overall costs and payment amounts so that this does not result in debt mounting and simply covers up a serious systemic financial problem.
In Conclusion
When times are rough, it is very important to make strategically sound financial decisions. The slightest error in judgment could bring your business to the verge of bankruptcy. At these times, it is important to rely on instincts, but more focus should be given to financial trends, your company’s numbers and other relevant data.
While you cannot control the course of the economy, what you can control is how your business runs. Tough financial situations will bring lots of challenges to your company, but the only way out is to deal with them the smart way through an efficient business strategy and a growth mindset.
