The last recession started in 2007 and reached its bottom around March 2009. During the recession, many smaller companies went out of business or were acquired by larger, more stable companies in their industry. In a very short time period thereafter, stocks regained significant value and the housing market started to recover. If you ask most people, they would associate these two events to the economy being back on track, right? Wrong.
The reality is that there is still more bad news than good news about the economy. Even though 165,000 new jobs have been created since January 2013, the unemployment rate has only decreased by 0.4 percentage point. Also, if you look at your most recent retirement account growth, you will notice that it has slowed considerably and in some cases, is almost nonexistent! This is due to weaker company earnings which leads to stagnant stock growth. You may have also noticed that many well-known millionaires and billionaires such as Warren Buffet, George Soros, and John Paulson are selling their stock positions. Lastly, many smaller fuel stations have either closed down or stopped selling auto fuel. The margins are not there for them to be successful. The writing is on the wall. We are moving toward a market correction and quite possibly a more serious financial crisis. But when will we begin to see these crisis’ take place? It is anyone’s guess but I strongly believe that we will see the start of it in Q3 or early Q4 2013.
This leads us to focus on you and your business. What are you doing to make sure your business moves forward through tough times? This past recession should have prompted you to take action in order to survive but this next larger scale recession (or collapse) could be more catastrophic. Are you prepared?
For smaller business enterprises, I recommend focusing on cash flow. Cash flow is the lifeblood of any business but especially a small business. You need to become good at anticipating money flow in and money flow out. Unexpected emergencies or large outflows of money can cripple a business. Combine poor cash flow management with a major market recession and you have a rapidly failing business.
In addition to cash flow management, look at the problem your business is solving. Is it recession proof? Do consumers need your product or service in good or bad times? I have learned that the bigger the problem you are solving, the more money there is to be made. How big of a problem does your company solve or is your company selling novelty products? If you find yourself in a business model of selling novelty products, you may want to consider diversifying if possible and reasonable to do so. Novelties such as beanie babies, baseball trading cards, etc. have their boom and there is a lot of money to be made but they also have their bust. Novelty based businesses cannot survive without innovating and evolving their business model to include the newest and greatest fads and fashions that consumers want.
Lastly, I recommend building a cash reserve for your business. This is a lot like building your personal emergency fund. Build up enough cash to cover all of your expenses for at least six months but preferably longer. That way you have something to fall back on in the event of slowing sales revenues. A line of credit with a bank is a great tool for this purpose as you don’t have a lot of cash sitting idle for long periods of time and you’re not paying for the money until you use it. Just be careful – banks can freeze or close the line of credit at their discretion so don’t rely 100% on this as your reserve.