Try as we might, it seems that there will be no avoiding a recession in 2023. How deep it is, and how prolonged, still remains to be seen.
For retailers, it's not a matter of whether your business will be impacted, just how much. Alas, retail does not lend itself to being recession proof.
However, there are ways to make your business more recession resistant.
The place to start? First, find out what your Debt-to-Worth ratio is right now. That is the #1 measure of the financial strength of your business. It's a key indicator of your ability to weather an economic downturn.
- It's easy to calculate. Look on your most recent Balance Sheet. Find the Total Liabilities (short-term plus long-term) – accounts payable to the vendors; other accounts payable; any notes payable; credit card balances; long term loans; etc – and divide that Total Liabilities amount by the Net Worth, or Equity, of the business.
- The lower the Debt-to-Worth ratio, the financially stronger your business. The "debt" is what is owed to others (just like the mortgage on your house); the "worth" or equity is your ownership of the business.
- As an example, if your Debt-to-Worth ratio now is 5 to 1, it means that your total debt is 5 times the equity in your business. With a recession looming, consider getting that Debt-to-Worth ratio to 4 to 1, or 3 to 1, or even 2 to 1, and you will be more recession resistant.
So, with this as your starting point, your goal is to get your Debt-to-Worth ratio lower. How to do that?
Well, it won't be easy. But here are some ways to start.
(By the way, prepare your mindset: you likely will be incurring losses. Since the only way to pay amounts owed is with cash, you must choose cash over profits.)
- Convert more assets into cash – whether through clearance sales, cutting departments, closing stores – and use that to pay down debt.
- Cut back on money going out, and apply those funds to expenses already incurred.
- Reduce inventory purchases: fewer vendors; fewer lines; more special orders; etc.
- Reduce expenses: involve your staff in these decisions; they will have practical ideas of costs that can be reduced.
As you reduce debt, your Debt-to-Worth ratio will be improving – that is, it is getting to be a lower and lower number. And that means the survivability of your business is increasing during what may be a downward economic cycle.
And once the recession subsides, your business will be well-positioned to seize the opportunities of a better economic climate.