Facing An Impending Recession: How To Manage Your Capital in a Declining Economy

With a recent CNBC report revealing that eight out of 10 small business owners expect a recession this year, it is clear that a recession is coming sooner or later. This will be difficult for businesses because they need positive working capital and cash flow to grow. However, if the past two to three years have taught us anything, there’s potential for growth and success even in the worst times. This development depends on one’s willingness to embrace new tools and strategies. Even if access to working capital is limited, companies can continue to grow and seize an opportunity when many of their competitors are struggling by leveraging some smart investment strategies. 

There are few sure things in an economic environment like this, but there are some strategies that you can typically count on during a downturn. 

Focus on the Fundamentals

The first step companies should take is to get an overview of their financial fundamentals. If you want to be certain that you’ll have access to the working capital needed for steady growth, you need to establish an adequate working capital cash-flow cycle. This can be accomplished by reviewing your cash-flow statement monthly and projecting it into the future with the help of a pro forma profit and loss statement. From there, you can make strategic decisions to reduce expenses to maintain your cash-flow cycle running smoothly. 

Prioritize Efficiency 

When times are tough, it is vital to take a hard look at where your money is going and determine if there are ways to minimize expenses and boost margins. This can range from analyzing your product mix and minimizing inventory of lower selling offerings to reducing vendor material and supply chain costs. It’s also a good idea to look into diversifying your supply chains. The pandemic has highlighted how much of an impact supply chain disruptions can have, and it isn’t likely to they will be any less common during a recession. 

Diversify Your Portfolio 

Good investors know that a well-diversified portfolio is essential for mitigating risk and preventing serious losses during a recession. While it’s tempting to chase high-flying tech stocks or single-company ETFs to get a big short-term return, this risky investing is even more dangerous during an economic downturn than it would be during a more stable period. It is best to play things safe and smart, sticking with a well-diversified portfolio of quality stocks, safe fixed income (including inflation-protected U.S. Treasury securities), and diversifiers like real estate or other alternative assets.

Play The Long Game

When it comes to investing, the most important thing to do is to stay the course. Making market movements can certainly be exciting. Despite it be tempting to try and maximize your profits by matching up with market shifts, one must remember that investing is a long game where you benefit most from sticking it out over the bumps. Never underestimate how far you can fall if you try to game the system.

While it’s hard to know when the recession will truly take hold, it is important to take steps to mitigate its impact. By taking an efficient, strategic, and long-term approach to finance and investing, companies can mitigate the impact of the looming recession, keep a steady flow of working capital, and find new opportunities for success.