Maximize Revenues, Cut Costs and Watch Those KPIs

As major economic indicators point toward a coming recession, now is a good time to pay extra attention to cash flow forecasting. Looking at all the factors that impact your business can help you plan how you will conserve cash, restrain spending and make it through a recession on solid footing.

The likelihood of a recession is still being debated by economists, with Federal Reserve Chairman Jerome Powell saying recession is a possibility, but not an inevitability. With inflation running above 9%, the central bank’s efforts to cool off the overheated run up in consumer prices and commodities are having little effect, so far. While an inflation-triggered recession could be less severe than one induced by credit excesses, any recession can do a lot of damage, especially to businesses that are not adequately prepared.

Preparing for Recession

So, how do you prepare your business for a recession? In essence, you take stock of every facet of your business with an eye toward maximizing revenues, cutting costs and staying on top of the key performance indicators that reflect healthy operations.

Some key factors include:

  • Financial management – Your leadership team and key stakeholders need real-time financial data to understand how your company is doing and where changes are needed. They need this information during good times, but they really need it as they face a recession. Key performance indicators (KPIs) should be presented at a glance, summarizing in an easy-to-read format operational and financial data such as how many days of cash you have on hand, factors that are driving revenue, sudden variations in sales and other factors. These KPIs should be up to date, not a month or a quarter past. Make sure you are using financial management technology that can produce real-time data so management can make forward-looking adjustments before small problems become big ones.
  • Pricing – Closely monitor input and overhead costs and determine how hard inflation is hitting your business. Market pricing is no longer a safe haven; you may need to increase prices to avoid playing catch-up later. Customer response may be kinder if you position price increases as temporary measures. Customers expect price increases during inflationary periods so focus on price adjustments to maintain your margins rather than attempting to only cover cost increases. Your pricing strategy may include renegotiating sales contracts that were based on a cost structure that is no longer a reality.
  • Growth – Grow real revenue, not inflationary revenue. To do this, factor inflation into your year-over-year comparisons. Focus on your most profitable business segments and consider exiting those that do not produce real growth.
  • Business Practices – Set goals for working capital and cash. Watch for unplanned growth in inventory, especially as goods that were caught in supply chain bottlenecks are now breaking loose and arriving at your loading dock. Also, watch receivables more closely than normal and follow up quickly on accounts that are 30 days or more overdue.
  • Automation – It may seem counterintuitive to invest in technology on the cusp of a recession, especially with inflation running high, but improving your technology can help you cut costs and operate leaner into the future. Besides streamlining your operations and financial management, updated technology systems can help you leverage staff in a challenging labor market.
  • Financing – If you are considering implementing programs that involve financing, rising interest rates may cause you to reevaluate their cost effectiveness. If your business has strong cash flow from operations, giving you the ability to self-finance your planned changes, that may be the way to go, assuming you would still have a healthy amount of cash on hand. But avoid borrowing if you can. The Fed already boosted interest rates by 25 basis points earlier this year and has indicated more rate increases are on the horizon.
  • Communication – Educate your employees about the impact of inflation on your business and your customers, so they understand and support the changes you are making. Make sure they understand their individual roles, and they have the tools and information they need to succeed.

The businesses that pull through recessions on solid footing typically are those with strong cash flow and forward-looking financial management based on real-time data.

Contact your Adams Brown advisor for a discussion about your cash flow forecasting and how you can strengthen your business heading into a recession.