How to Manage Finance During a Recession
The Bank of England’s recent announcement that the UK is facing its longest recession since records began will have caused concern for business leaders across the country. Many will be wondering how they can cut costs without negatively impacting staff morale or the services they provide to customers.
It’s not just employers who are feeling anxious. With unemployment rates forecast to rise to 6.5% by 2025, many employees will be worrying about job security, against a backdrop of the cost of living crisis and rising interest rates.
All of this does not make for a happy workplace. But over the years I’ve learned some important lessons about how employers can navigate choppy waters, conduct scenario planning, and cut costs without causing upset among their teams. Here are five key principles that business leaders should keep in mind.
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Be directionally right — not precisely wrong
Obsessing over minor savings in every area of your operation could mean that you ignore the bigger picture. You should take the same approach as a physicist — think about orders of magnitude and start with a high-level view rather than going granular straight away.
With this outlook, you can perform sanity checks on a regular basis and not get sucked into the trap of fine-tuning every number to the second decimal. Putting everything under a microscope is a waste of time if the big numbers still don’t add up. Remember what your ultimate goal is and make sure you take big strides towards it — not baby steps.
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Cash (management) is king
Developing knowledge around the principles of cash management within any organisation is a good idea whether times are hard or not. While business leaders are often skilled in understanding and manipulating profit and loss, they often don’t know the ins and outs of cash management and cash flow.
Making cuts across the board is never the right approach. Fat is always distributed unequally in businesses, so a surgical approach is required. Cut spending in some areas, while investing in others that will help you to grow more muscle. In an ideal world, you’ll cut out all of the things that don’t work, and further invest in all of the things that do.
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Keep it simple
Sophisticated business models with high levels of functionality and reams of features often aren’t suited to tough economic circumstances. Think about what it is that your customers really need at this time and focus on that part of your offering, and leave the bells and whistles for another day.
In my experience, building a simplified business model can be more difficult than building one with high levels of complexity; but remember to focus on the larger orders of magnitude as you will have very little margin of error when the recession starts to bite.
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Keep providing the good coffee
You won’t make major savings by switching to a cheaper brand of coffee, but you will undermine staff morale. Not just because staff will waste time complaining to each other about the standard of the new brand, but they’ll also go out in search of decent coffee — time that a happy employee would otherwise be spending productively.
It’s not just the coffee that you need to preserve; think carefully about cutting back on employee perks. If you need to make cutbacks, consider the biggest cost buckets first. No negotiation is taboo, even rent. Could you make savings by moving your team into a smaller office? I’ve seen facilities teams perform miracles in optimising office space.
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Celebrate your victories
Making sure everyone gets a pat on the back when the business has hit KPIs and significant milestones is essential for boosting morale. Take time to show everyone that their efforts are appreciated and give them an opportunity to let their hair down and share in the glory of their collective efforts.
When times are tough, it’s important to ensure you focus on achievable goals. Revenue growth might not be possible, but growing market share may very well be realistic. When the turnaround comes, you’ll have a team of happy, motivated people hungry for more success, putting you in a great position to reap the rewards.
In an economic downturn, technology can help with financial planning and forecasting, but there’s no crystal ball. Stakeholder management and communication are therefore key in these times. Be honest with your team and be absolutely clear about what you are trying to achieve.
Cost-cutting is often necessary in the face of recession, but businesses shouldn’t cut back on spending which will negatively impact staff or the offerings of the company. By taking a simplified approach, focusing on the things that really matter and ensuring staff morale is high, businesses can put themselves in the best position to weather the economic storm.