The coronavirus pandemic has precipitated an economic crisis, and businesses, regardless of size, need to brace for the impact. While it may not be a complete disaster, implementing crisis management methods is still important. One of the most important steps a business has to take in a crisis is reducing expenses.
While every business is likely to feel the pinch, undoubtedly, it is startups that will be the hardest hit. But there’s no cause for panic; this is not the first economic downturn the world has seen, and it won’t be the last either. In this article, we present a few easy practices that will help you manage your cash flow better, and tide over the recession.
The Importance of P&L Statement During a Recession
A profit and loss statement is a summary of the total revenue, incomes, and expenditures a business incurs in a specific period. This financial statement shows the net profit or loss of the business based on revenues, and expenses like salaries, rent, insurance, utilities, commissions, marketing, and so on. Modern businesses have other expenses like domain name and hosting maintenance, social media marketing, and other website or online marketing related expenses. Now this last expenditure cannot be compromised in today’s world, as having a robust online presence is critical for business success nowadays.
The P&L statement mirrors the capacity or otherwise of a business to turn a profit by decreasing expenses, boosting revenues, or both. It helps managers and entrepreneurs to assess the chances of a business to tide over a lengthy recession. The statement shows all the funds that are currently operational in the business, and also grants insights into how costs can be brought down, and to review budgets for a specific period to be able to predict the best, and worst-case scenarios for that period.
If you don’t have an accountant who can prepare the P&L account, you can invest in software that helps in managing expenses, or a full-fledged accounting solution.
Experts predict that in the next five years, only half of the startups and small businesses will survive – as of now, a good number of SMEs have already closed shop.
As nobody can predict how long the present economic crisis will last, it would be wise to gear up for the worst possible scenario, and be well informed and prepared with smart cash flow management.
Expense Reduction - A Critical Requirement
Reducing business expenses is the first step towards creating a contingency plan to withstand an economic crisis. According to a study conducted by Startup Genome, it is essential that business have cash that is at least 3 to 6 months’ worth at the time of closing
Expense management and reporting software can help you manage your expenditures effectively and precisely; there are free solutions, and paid ones at varying prices. Startups are more vulnerable, and must deal with the crisis urgently, and smart budgeting is one of the best steps they can take. Here’s how you can do that:
Avoid non-essential Spending
In the normal course of things, they may seem to be insignificant, but if you carefully look, they could be taking up a big part of your budget. This could be in the form of:
- Snacks and beverages
- Celebrations and parties
- Fitness packages for employees
- Paid courses for staff
Of course, you cannot stop buying stationery or beverages, but stock up only on what is necessary, and look for cheaper options. Some things can be paused for the time being – most importantly, communicate with your employees why you’re doing it, and that it’s temporary.
Rent an office for a lower cost
If you’ve been renting an office, look for a cheaper office space – and it’s likely to be more comfortable too. Why? The pandemic has freed up many rental office spaces, as several businesses have shut shop – so there are likely to be many good office spaces available for rent at lower prices. Keep an eye out for these, it will help you reduce your expenses considerably for the next few months.
Open Communication with a Team
For the success of any business activity, it is imperative that there is clear, effective communication between the management and employees. A recession is a worrying time for everyone – entrepreneurs are worried about business continuity, and employees about their jobs. Communicate with your team regularly, and update them about the current situation of the business, and financial prediction, so that they know how you plan to cut costs. By having an open communication policy, you will be able to boost morale and improve productivity – this collaboration and communication can be easily achieved and maintained with software solutions like IPIX PMS.
Temporary salary reduction as a critical precaution
Usually, the biggest expenditure for any business is salaries – and businesses try not to reduce salaries even in recession, as employees are the lifeblood of a business. But this step may become necessary in a prolonged recession. Of course, it is important that you make it clear that this is a temporary step, and that the salary level will go back to the original level once the recession ends. By installing appropriate budgeting software, you will be able to manage this beautifully.
Assessing Business Resilience in a Recession
Evaluating your business resilience is of critical importance during a recession – in fact, you should incorporate it into your business strategy, whether you’re facing a recession or not. This will enable a business to be well prepared for a crisis and begin smart budgeting accordingly.
This is where your profit and loss statement will come into play; examine the information therein and make a prediction: for how long will your business be able to operate with the same monthly income and expenditure. You will have to consider that the number of customers may have come down significantly, as well as the cost of the projects you’re doing.
If in case your forecast is that the business will survive for the next six months, then you have a very good possibility of tiding over a recession without losing a whole lot. But if the prediction is not rosy, you may need to take another look at your budget, with curtailed expenditure for the coming few months.
Examine every item of expenditure, and evaluate the areas that you can trim the expenditure without causing too much stress, and calculate optimal expenses in a critical situation.
To Sum Up
The Covid-19 pandemic and resultant looming recession is posing a big challenge to all of us, and teaching us all about digital transformation, managing crises, and budgeting smartly – all tools of survival. Nearly every business has started the process of re-thinking their business models, and financial readjustment. Being well informed is critical to perform crisis management, and stay afloat in an economic downturn. Investing in Business management software, risk management software, accounting software, and project management software can help in efficient planning, budgeting, and managing cash flows to maintain business stability.