The Importance Of Financial Planning During An Economic Downturn

Financial planning is always a great idea. However, when there is an economic downturn, businesses need to survive. With skyrocketing costs to labour shortages and issues in the supply chain to name a few concerns,  Here we delve deeper into the importance of financial planning for your business during an economic downturn.

Embrace technology

Accounting software has gone through leaps and bounds over recent years and can be a major help with business planning. You are able to access data in real time, making your numbers that much more accurate. Not only can online accounting software provide you with a great picture of the business’ financial health, but you can also end up saving money and increasing profits at the same time.

Plan for changes with scenario analysis

Scenario analysis is a great tool to enable you to see different scenarios, including best and worst case. Preparing for a range of scenarios will let you be as prepared as possible for whichever scenario turns into a reality. Successful scenario analysis means you will have the relevant resources and strategy in place regardless.

Consider changing your pricing strategy

Rising costs often mean businesses have to pass this increase directly onto customers. Whilst this is a realistic and sometimes necessary option, it can affect how good value your goods and services are and may end up losing business. Whilst it seems counterintuitive, lowering costs can actually improve your profitability. Just ensure you plan your pricing strategy carefully before making changes as it is difficult to increase prices and keep customers happy.

Also, don’t be concerned if you do have to increase prices. As we mentioned earlier, this is sometimes unavoidable and customers will understand. Inform your customers about the price increase in advance and explain to customers exactly why you are charging more. Customers will appreciate the honesty and will be more likely to return to you at a later date. Research what the predicted impact of the price increase will look like as it’s a balancing act. Hiking the prices up too much may isolate your customer base and force them to look elsewhere.

Reduce costs

Just because prices are rising across the board, it doesn’t mean there is still no savings to be made. Bulk buying, negotiating costs, or switching to an alternative supplier is still a worthy task to carry out to save money.

Reduce your inventory

It is important to manage your inventory effectively to stop having too much capital tied up in it. Whilst you may benefit from economies of scale, you shouldn’t have more materials than you need as during a volatile economic climate, demand for your products may significantly drop, even if only temporarily.

Manage debt

Any debt your company has must be kept under control. You could try renegotiating your contract or terms. Whilst they may not be able to be changed, there is no harm in asking.

Control Cash Flow

Cash is king during tough economic times and ineffective movement of money in and out of your business can impact your ability to pay bills, buy more stock or invest in other areas of the business to facilitate growth. Make sure you invoice straight away and ensure payment terms are agreed in advance. Always keep your accounts up to date and try and keep a reserve of cash to help during the times it’s most needed.

Speak to your accountant

Your accountant will be able to discuss strategies with you and substantially help with your financial planning. They will help identify which tax reliefs are available to your business and will answer any tax-related questions you have.

You can’t predict exactly what will happen with the economic climate, however, being proactive with your financial planning can make all the difference. With the cost of living crisis and predicted recession on the horizon, effective financial planning will help provide you with a clear picture that can help you weather the storm. Whilst financial forecasting and budgeting is a traditional practice, it is still as important today as it ever has been. We understand that times like these can be difficult for companies and we are here to help you be as productive and efficient as possible. If you need further help or advice speak to a member of the Wright Vigar team.