How to Prepare for a Recession
A recession or economic downturn is a business owner’s worst scenario. As it might affect not only your personal finances but also threaten your business’ survival. The impact of a recession on your business at times can be hard to predict.
No matter how bad it gets, preparing for a likely recession can go a long way to mitigate the adverse effects of the recession on your business. In the article, we offer our step-by-step guide on how to prepare your business for a recession.
How to Prepare for a Recession
It is never too late to prepare for a recession as it is a natural cycle of the economy. As a business owner, you need to assess your current business strategies and tweak your business model to ensure you are prepared to weather the storm. Here are some tips on how to prepare for the coming recession (whenever that is):
Prepare an Emergency Fund
An emergency fund is money you set apart from other savings preferably in a high-yield savings account. A high-yield savings account allows you to receive a higher interest rate than a traditional savings account and because you only use the funds in case of emergencies the interest can accumulate.
The purpose of an emergency fund is to help you deal with unexpected events such as loss of income, covering a large inventory, a lawsuit, loss of employees, and more. Ideally, it is recommended that you have enough savings to cover three to six months of your business expenses. That could afford you not only a financial cushion to weather the storm but also ensure that your business is in financial health irrespective of whatever calamity it may face.
Rebalance and Revisit Stock Market Assets
In the event of a recession, it is important to be on top of your investment portfolio and might want to rebalance them. In other words, you might need to sell some stocks and buy more of others. Rebalancing your investment portfolio safeguards you from being overly exposed to undesirable risks. Very often stock performances are prone to fluctuations compared to bonds. In such instances offloading non-performing stock investments and buying more bonds is recommended to mitigate volatility and risk.
Pay Off Your Credit Card Debt to Avoid Increased Interest Rates
If your business is carrying any high-interest-rate debt, you should start focusing on debt payments, when a recession hits the Federal Reserve has the option to raise interest rates. If you have credit card debt you might want to pay off your debts before incurring more debts through the additional interest. This goes for other debts which your business might have taken on as you may be forced to take on the additional cost of repaying high-interest debt. Ultimately this also helps you to get a better credit score.
Have a Financial Plan
Having a well-thought-through financial plan can help in challenging times. You will need to review your finances first to identify your needs and financial health. It is important that you get on top of your finances before a recession hits. A healthy financial situation can not only prevent losses but help fuel your business growth. Your financial plan should include a budget, healthy savings, investments in multiple financial products, and earning goals.
Cut Out Unnecessary Costs
One part of being financially secure is to maintain financial stability by cutting out unnecessary spending. Start tracking your usual expenses, then figure out where you can cut spending while maintaining your essential expenses to run your business. By cutting back on unnecessary spending ahead of a recession you get to increase your investments and emergency fund contributions to create your own safety net.
Look for Additional Ways to Make More Money
Whether things are heading towards a recession or not, you should consider business models that can supplement your income. Look towards products and services that are underserved in the market which you can fill with ease. Look towards technology to give you that additional edge such as opening an online store and drop shipping.
READ MORE: What is a Recession?
How to Capitalize on a Recession
A recession is an inevitable phenomenon in any economy. When a recession occurs people will face financial troubles, possibly lose money, and maybe even their businesses as well. But this doesn’t have to be you. If you make the right decisions now, then a recession might be a lucrative opportunity for you to make more money.
Consider Buying Real Estate
Interestingly investing in real estate can pay off during an economic recession. Usually, when a recession hits, home prices drop opening up opportunities to invest in properties. You can rent out those properties to get a steady stream of income while riding out the recession. And once real estate values start to rise again, you can sell the property at a profit.
Invest in Precious Metals
Gold, silver, and other precious metals can be lucrative investments as well. In fact, historical trends indicate when global stock prices plummeted, the prices of gold and silver did well.
Tweak Your Offerings.
Look for ways to modify your business offering to make it more attractive to customers during a recession. Because consumers’ spending decreases you will need to tweak your product or service. This includes how it’s delivered, or how it’s priced, in order to cater to customers’ needs that might change during a recession. You can vary the packaging sizes, offer services online, and more.
Invest in Businesses and Stocks that are Recession-Proof
There are some financial opportunities during a recession. Investing in business and stocks in health care or utilities are often recession-proof investments. This is because consumers will still need to purchase medical care and electricity, irrespective of the economic situation. Other businesses to look into include auto repair and maintenance, bargain and discount stores, and grocery stores.
Is a Recession Coming in 2022?
Currently, there is a lot of speculation about a possible recession on the horizon. This is partly due to rising inflation, a global conflict that has raised prices on key commodities such as oil, and the Federal Reserve raising interest rates. Very often it is difficult to predict when the next recession will hit and how long it could last, as there are various factors that come into play. But preparing for a possible recession is part of prudent business planning. In fact, many business owners fail to plan for a recession.
Where should you put money in a recession?
Investing during a recession can be a tricky experience, as the market can be highly volatile. The key here is to stay focused on your long-term plan and the better days ahead once the market turns around. An important piece of advice to remember is to keep your emotions from influencing your financial decision-making.
What thrives during a recession?
Industries in communication services, consumer staples, energy, financials, health care, real estate, and utilities usually fare well during recessions.
READ MORE: 19 Recession Proof Businesses
What should you own in a recession?
They are several types of bond funds available for risk-averse investors. Popular funds during negative economic growth include U.S. Treasury bonds and municipal bond funds that are issued by state and local governments. These bonds leverage local taxing authority to provide a high degree of safety and security to investors.
What’s the best thing to do in a recession?
The best thing to do during a recession is not to panic and focus on your long-term financial goals. You should pay extra attention to your spending and be wary of taking unnecessary risks such as incurring more debt.
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