The global economy is facing an uncertain future, and for many businesses, preparing for a recession is becoming part of the strategic business plan. Manufacturing companies are particularly vulnerable to economic downturns, with many concerned about an upcoming recession and what negative impact the recession could have on their business. With the difficult environment manufacturing businesses have faced over the last few years, a potential recession could bring on new and unwanted challenges. Preparing in advance can help manufacturing companies weather a potential recession, minimize the impact to their business and even gain advantages over competitors in the marketplace.
We have identified five practical steps that manufacturing companies can take to prepare for a recession:
- Reduce Costs: Reducing costs should be a priority during times of economic uncertainty. Companies should look for ways to reduce their overhead expenses without compromising quality or customer service standards. This could include renegotiating long-term contracts with suppliers at favorable prices, cutting back on advertising and marketing initiatives and reducing staff, if necessary. It is also important to review all ongoing projects and prioritize those that will have the most impact on revenue generation or cost savings. For example, consider finding local vendors to reduce freight costs. Management should have a good understanding of what costs are variable and can be reduced quickly if the need arises.
- Focus on Cash Flow Management: Companies should ensure they have adequate cash reserves available to provide them with flexibility if demand decreases during a recessionary period. This includes monitoring accounts receivable closely so customers pay promptly; negotiating longer payment terms from suppliers where possible; implementing stricter credit policies or credit limits; ensuring any loans taken remain up-to-date; and taking advantage of government assistance programs if applicable (e.g., ERC, tax breaks). Also, take a close look at any capital expenditures to ensure they have a high return on investment (ROI) or consider leasing key equipment. Implementing cash flow management tools now will be easier than waiting until a recession when many others are trying to manage their cash flow
- Increase Efficiency and Flexibility: Increasing efficiency is key to keeping costs down while meeting customer needs. Companies should focus on streamlining processes, investing in innovative technology, automating tasks where appropriate, improving inventory management and leveraging data analytics tools to identify areas of improvement across operations. Also, consider building flexibility into your workforce – salary costs are often very expensive when running a business. Practical ways to build flexibility include increasing overtime instead of hiring new employees, using independent contractors, outsourcing and cross-training employees. Additionally, it’s important to invest time into training employees on any innovation and technology changes to improve implementation and engagement – if you’re located in the state of Georgia, you can potentially offset your training investment of employees by taking advantage of the Georgia retraining tax credit, which can help offset employee training expenses with an annual maximum credit amount of $1,250 per employee.
- Diversify Business Models: During tough economic times, manufacturing companies should consider diversifying business models by expanding product lines or offering services that complement existing products/services offered by your company. This helps increase sales opportunities, even when demand drops off significantly due to reduced consumer spending power during recessions. Companies should also explore alternative channels such as e-commerce platforms, which offer increased reach compared to traditional retail outlets.
- Strengthen Customer Relationships: Building strong relationships with customers is essential not only before but also during an economic downturn, helping you remain top-of-mind with your customers through regular communication (email, newsletters, social media, etc.). Work to understand how the recession is affecting your customers so that you can respond to their needs and drive customer loyalty. Regularly updating your customers about changes within your organization gives you an edge over competitors who do not do this proactively.
Windham Brannon’s team of professionals is well-versed in the needs of manufacturing companies in shifting and uncertain markets. To learn more about protecting your company during recessionary times, reach out to your Windham Brannon advisor, or contact Daniel Pullman.
