The CFO'S Perspective

What Should Organizations Do to Prepare for a Recession?


We’re trying something new today by giving our readers access to insights from an internal conversation we’ve been having! In a recent team meeting our experienced CFOs were discussing what organizations can do to get ready for a recession or economic downturn. The list of tips that our team came up with to prepare your business for a recession offers great advice for for-profit and non-profit entities alike, no matter what the future holds. Below is the result of that brainstorming session.

We hope that you will find this information valuable and will share it with your colleagues.

Q: How can companies or nonprofits prepare for a recession?

A: Ask the right questions.

The first step in preparing for a recession is asking the right questions. Your leadership should be discussing what the impacts of a recession will look like realistically for your organization and doing scenario planning from there. They should ask questions about the organization’s past to shape their future efforts as well. Questions like “Has the organization been through a recession before? If so, how did it prepare and/or react?” and “What happened as a result?” will help with planning.

A: Do scenario planning.

A recession will affect various industries and types of organizations differently. For instance, businesses may be dealing with a shrinking customer base while nonprofits may be dealing with increased needs for their services at a time when their operating budgets are shrinking due to a decrease in donations. Understanding how a recession could affect your organization is key in developing a plan to overcome the kinds of new challenges it may face.

But do not make the mistake of just making one plan. Effective scenario planning should cover a variety of scenarios that may occur as a result of a recession. Create a series of plans that detail how your organization will respond to different types of recessionary impacts across different time horizons. If economic speculation is indicating a lengthy recessionary period may be coming, scenario planning should be geared towards weathering a prolonged recession.

A: Conduct a mid-year budget review.

Do not wait until the end of the year to do a full financial review of budgeting, reporting, projections, and internal controls. Conduct a more immediate financial assessment either internally or with the help of a third-party financial services provider to understand how actual expenses compare to budgeted amounts and make adjustments to spending where necessary to maintain appropriate cash flow. Moving forward, increase reporting frequency to ensure that the organization will be better poised to respond to market changes as quickly as they occur.

A: Understand your cash position.

Doing a mid-year budget review will help provide key information related to the organization’s cash position. Using a cash flow calculator or similar tool will help determine what kind of an impact economic changes are already having on cash flow to better inform future spending and financing efforts. During a recession loans and alternative funding may be harder to secure, which makes having a deep understanding of the organization’s cash position before these avenues tighten up crucial. Then, make a cash plan based on your current position.

A: Create a rolling forecast.

As the economic climate gets more tumultuous and uncertainty increases, using a rolling forecast becomes even more important. Instead of doing static forecasting on a weekly or monthly basis, implement the systems needed to create rolling forecasts so that the organization can be continuously forecasting in response to sales, supply chain, and industry changes.

A: Evaluate expansion opportunities that offer a good cash perspective.

Explore expansion opportunities wisely. Do not enter a new market or launch a new product line without thoroughly evaluating the cash implications of doing so. Only pursue opportunities that offer a good cash return to avoid tying up too much capital into new ventures during a time when cash flow is going to be constrained by external forces. Where prospects become available that carry significant uncertainty, utilize the help of an experienced financial consultant to thoroughly vet those opportunities.

A: Talk to your banker.

When credit starts to dry up the relationship you have with your banker becomes even more important. Talk to your banker one on one to get the most up-to-date information on what is going on in their world. Take them to lunch to find out what your bank is planning and which markers they are looking at for underwriting, deposit requirements, and new/renewed credit requests. Then, use this information to inform your business strategy to put the organization in a better position if/when it needs to secure additional funding.

A: Understand where cuts can be made.

During a recession, budget cuts may be inevitable. Start thinking about who or what you can live without, but do not jump anxiously into cutting costs. Cuts should be made with a scalpel, not a hatchet. As our team explains when discussing how to strategically invest in your business during a downturn,

“Do not rush to cut costs or make deep cuts indiscriminately, especially as it relates to headcount… Instead, reduce costs selectively. Aim to control costs instead of just eliminating them… Focus on bottom-line growth as well as top-line growth because simply trying to recoup lost revenue will not get you through a recession without also controlling expenses.”

A: Evaluate future hiring plans.

Evaluate hiring plans with a cost-savings mindset as well. Remember, sometimes the best way to control costs is not to cut existing expenses, but to reduce or defer future planned expenses. Work closely with HR to carefully plan your future hiring strategy in a way that benefits the organization without needlessly increasing costs. Where outsourcing business processes and roles and can replace in-house hiring, explore these options for a cost-effective way to do more without increasing overhead costs.

A: Sell your business and retire.

The typical business sale planning process takes 3-5 years to complete, so if you suspect a recession is coming you likely will not get the full value of your business if you try to hurry up and sell it immediately. However, if you are thinking about going down this road within the next decade, it does not hurt to keep this option on your radar in case opportunities arise to get out sooner. It is never too early to start working with a consulting CFO to get your business ready to sell.

When you need strong financial leadership, let us help! We offer CFO consulting services to organizations with less-than-full-time needs as well as accounting and finance executive recruiting services to help companies find the right candidates for in-house roles.

Still unsure? We measure our success by the value we create for our clients. Find out what past clients have said about our work.

Related posts

Topics: Planning, Forecasting, Risk Management, Strategy

Topics: Planning Forecasting Risk Management Strategy