We’ve asked the experts and searched the web. These nine measures stand out when CFOs work to prepare their business for the challenges posed by recessions.
At House of Control we’ve been asking nearly a dozen CFOs, financial controllers, auditors and other experts what they do to prepare their business when a recession is looming. We’ve also researched the websites of major auditing and accounting firms, looking for answers to the same questions.
No list will ever be perfect, but we’ve seen that at least nine common denominators stand out. Further down, we elaborate on each one of them. These nine measures are (click to go to full description):
- Reviewing and strengthening the company's financial position by reducing debt and increasing cash reserves
- Reviewing the company's cost structure and identifying areas where costs can be reduced
- Diversifying revenue streams to reduce dependence on any one market or customer
- Keeping a close eye on economic indicators and assessing the potential impact on the business
- Communicating regularly with other departments, such as sales and marketing, to understand the potential impact of a recession on their areas and develop plans to mitigate those impacts
- Building strong relationships with suppliers and customers to ensure continuity of supply and demand during a recession
- Reviewing and updating the company's risk management strategies to address potential challenges during a recession
- Encouraging innovation and investment in new products, services and technologies to help the company stay competitive during a downturn
- Creating a detailed recession plan that outlines the steps the company will take in the event of a recession, including cost-cutting measures, revenue-generation strategies and communication plans
(Continue below the picture for detailed description of why each measure is important)
1. Reviewing and strengthening the company's financial position by reducing debt and increasing cash reserves
Reducing debt can help to lower the company's overall financial risk, making it less vulnerable to the impact of a recession. High levels of debt can make it difficult for a company to weather a downturn in the economy, as it may struggle to make loan payments or meet other financial obligations.
Increasing cash reserves can help the company to have a cushion to fall back on during a recession. When the economy slows down, many companies may find themselves in a cash crunch, which can make it difficult to pay bills, meet payroll, or invest in new projects. Having cash reserves in place can help the company to maintain its operations and weather the downturn.
Having a strong financial position can also help the company to take advantage of opportunities that may arise during a recession, such as buying assets at a discount or investing in new projects that have become more viable due to the economic conditions.
A strong financial position can also help the company to be more attractive to investors and lending institutions, which can be important if the company needs to raise additional capital during a recession.
Reviewing and strengthening the company's financial position can also help the company to identify and address any potential financial risks before a recession, which can help to mitigate the impact of a downturn in the economy.
Overall, by reviewing and strengthening the company's financial position before a recession, a CFO can help to mitigate the potential negative impact of a recession on the company and increase its chances of success during a downturn.
2. Reviewing the company's cost structure and identifying areas where costs can be reduced
Identifying areas where costs can be reduced can help the company to maintain profitability during a recession, when revenue may be declining. By reducing costs, the company can try to minimize the impact of the downturn on its bottom line.
Identifying areas where costs can be reduced can also help the company to free up cash, which can be important during a recession when cash flow may be tight.
Reviewing the company's cost structure can also help to identify inefficiencies and areas where the company may be overspending. By addressing these inefficiencies, the company can become more efficient and better positioned to weather a recession.
By identifying cost-cutting measures in advance of a recession, the company can be better prepared to quickly implement them if necessary.
Identifying areas where costs can be reduced can also help the company to maintain its competitive edge during a recession, by enabling it to lower its prices and remain competitive in the market.
Reviewing and identifying the cost structure can also help the company to make better and more informed decisions about where to allocate its resources in order to best position the company for a recession.
By reviewing the company's cost structure and identifying areas where costs can be reduced before a recession, a CFO can help the company to maintain profitability and financial stability during a downturn in the economy.
3. Diversifying revenue streams to reduce dependence on any one market or customer
Diversifying revenue streams can help
- to reduce the risk of the company's overall revenue being severely impacted by a downturn in a specific market or industry. By having multiple revenue streams, the company can be more insulated from the impact of a recession in any one area.
- to increase the company's resilience to the impact of a recession. With multiple revenue streams, the company can continue to generate revenue even if one stream is affected by a downturn.
- the company to identify new opportunities for growth and expansion, which can be important during a recession when opportunities may be more limited.
- provide a hedge against the risk of losing a significant customer or market. Relying on a single market or a few customers can be very risky and can put a company in a difficult situation if something happens to them during a recession.
- the company to maintain a stable cash flow, which can be important during a recession when cash flow may be tight.
By diversifying revenue streams before a recession, a CFO can help the company to reduce its overall risk, increase its resilience to the impact of a recession and maintain a stable cash flow during a downturn in the economy.
4. Keeping a close eye on economic indicators and assessing the potential impact on the business
Economic indicators can provide early warning signs of an impending recession and can help the CFO to prepare the company in advance of a downturn.
Monitoring economic indicators can also help the CFO to understand the current state of the economy and the potential impact on the company's specific industry and markets. This can help the CFO to make more informed decisions about how to manage the business during a recession.
Keeping a close eye on economic indicators can also help the CFO to identify potential risks and opportunities for the business. For example, if interest rates are low, it may be a good time for the company to borrow money, but if unemployment is high, it may be a good time to reduce costs.
Economic indicators can also help the CFO to track the progress of the recession, and to assess when the economy is starting to recover. This can help the CFO to plan for the future and make decisions about when to start re-investing in the business.
Economic indicators can also serve as a benchmark for the company's performance, allowing the CFO to measure the company's performance against the overall economic conditions, and understand if the company is underperforming or outperforming during a recession.
Overall, keeping a close eye on economic indicators and assessing their potential impact on the business can help a CFO to prepare the company for a recession, manage the business during a downturn, and make informed decisions about how to navigate the economic conditions.
5. Communicating regularly with other departments, such as sales and marketing, to understand the potential impact of a recession on their areas and develop plans to mitigate those impacts
Good communication can help the CFO to gain a comprehensive understanding of the potential impact of a recession on the entire business. Sales and marketing departments can provide valuable insights into how a recession may affect customer demand, while other departments can provide information on how a recession may affect production or supply chain.
By communicating regularly with other departments, the CFO can identify potential risks and opportunities that may not be immediately obvious. This can help the CFO to make better-informed decisions about how to manage the business during a recession.
Good communication can also help the CFO to build buy-in for any cost-cutting or other measures that may be necessary during a recession. By involving other departments in the decision-making process, the CFO can help to ensure that any measures are implemented smoothly and that all departments understand the rationale behind them.
Collaborating with other departments can also help to ensure that the company's strategy is consistent across all areas of the business, which can be essential for maintaining a unified approach during a recession.
Regular communication can also help the CFO to stay informed about the company's current performance and the effectiveness of the actions taken during a recession, and make necessary adjustments to the strategy.
In sum, by communicating regularly with other departments, a CFO can gain a comprehensive understanding of the potential impact of a recession on the business, identify potential risks and opportunities, build buy-in, maintain a unified approach and stay informed about the company's current performance.
6. Building strong relationships with suppliers and customers to ensure continuity of supply and demand during a recession
Strong relationships with suppliers can help to ensure continuity of supply, even if demand drops during a recession. This can help the company to maintain production levels and avoid disruptions to its supply chain.
Good relationships with customers can help to ensure continuity of demand, even if the overall economy is in a downturn. This can help the company to maintain sales and revenue, which is critical for maintaining financial stability during a recession.
Strong relationships with suppliers and customers can also help the company to negotiate more favorable terms, such as longer payment terms or volume discounts, which can help to mitigate the financial impact of a recession.
Building strong relationships with suppliers and customers can also help to identify new opportunities for growth, such as new products or markets, that can help to offset any losses during a recession.
Good relationships with suppliers and customers can also help the company to quickly and effectively communicate any changes or disruptions that may occur during a recession, allowing them to make necessary adjustments to their own operations.
Overall, building strong relationships with suppliers and customers can help a company to maintain stability during a recession and be better positioned to recover when the economy improves.
7. Reviewing and updating the company's risk management strategies to address potential challenges during a recession
A recession can increase the risk of financial losses, operational disruptions and other challenges. Reviewing and updating the company's risk management strategies can help the CFO to identify and mitigate these risks, and protect the company's financial stability and operations during a recession.
A recession can also expose previously unidentified risks, such as supply chain disruptions, changes in customer demand and increased competition. Reviewing and updating the company's risk management strategies can help the CFO to identify and address these new risks.
Having a robust risk management strategy in place can also help the company to be more attractive to investors and lending institutions, which can be important if the company needs to raise additional capital during a recession.
A well-designed risk management strategy can also help the company to respond quickly and effectively to any challenges that may arise during a recession.
Reviewing and updating the company's risk management strategies can also help the company to identify opportunities for growth and expansion, which can be important during a recession when opportunities may be more limited.
By reviewing and updating the company's risk management strategies, a CFO can help the company to identify and mitigate risks, protect the company's financial stability and operations, increase its attractiveness to investors and lending institutions, respond quickly and effectively to any challenges that may arise during a recession and identify opportunities for growth and expansion.
8. Encouraging innovation and investment in new products, services and technologies to help the company stay competitive during a downturn
Innovation and investment in new products, services and technologies can help the company to differentiate itself from competitors and maintain a competitive edge during a recession.
Developing new products, services and technologies can also help the company to tap into new markets, which can be important during a recession when demand may be low in traditional markets.
Innovation and investment can also help the company to increase efficiency and reduce costs, which can be important during a recession when profitability may be under pressure.
Encouraging innovation and investment can also help the company to stay relevant and adapt to changes in the market or industry, which can be especially important during a recession.
Investing in new products, services and technologies can also help the company to be better prepared for the future and take advantage of opportunities when the economy recovers.
Innovation and investment can also help the company to attract and retain talented employees, which can be important during a recession when competition for talent may be high.
By encouraging innovation and investment in new products, services, and technologies, a CFO can help the company to stay competitive, adapt to changes, increase efficiency and reduce costs, be better prepared for the future, and attract and retain talented employees during a downturn.
9. Creating a detailed recession plan that outlines the steps the company will take in the event of a recession, including cost-cutting measures, revenue-generation strategies and communication plans
Having a recession plan in place can help the company
- to identify and prioritize the most important actions that need to be taken during a recession, which can help to ensure that resources are allocated effectively.
- to provide a clear roadmap for the company's response to a recession, which can help to minimize confusion and ensure that all departments are working towards the same goals.
- to respond quickly and effectively to a downturn in the economy, which can be critical for maintaining financial stability and operations.
- to communicate effectively with stakeholders, such as employees, customers and investors, during a recession, which can be important for maintaining trust and confidence in the company.
- to be better prepared for future recessions and economic downturns. By having a plan in place and having gone through the process of developing and implementing it, the company will have a better understanding of the risks, and be better equipped to face them.
A recession plan can also serve as a benchmark for the company's performance, allowing the CFO to measure the company's progress and effectiveness during a recession.
Creating a detailed recession plan can help a CFO help the company to respond quickly and effectively to a downturn in the economy, prioritize actions, communicate effectively with stakeholders, measure performance, and be better prepared for future recessions and economic downturns.
