How to Recession-Proof Your Business

By Gene Walbroehl, CPA

Economic indicators can provide clues about what to expect for your business in the coming year. However, there are things you can do right now to recession-proof your business, such as year-end tax planning, bookkeeping and accounting strategies and improvements to your operations.

While business is good, use your assets to build reserves, invest in the right equipment, pay down debt and take advantage of low-interest lines of credit and financing.

Why Should You Build Business Reserves?

Owners who regularly pull some money out of their operating account for a reserve fund are doing two things for their business: they are building some interest income and they are creating a realistic picture of cash flow.

If your business has between three and six months’ worth of expenses stashed away, these reserve funds will put your business in a healthier position if market conditions change. Work toward that amount in reserves while you have positive cash flow.

Invest Now in Plant and Equipment

If your business relies on equipment, you can forecast when significant equipment will need to be replaced. If you anticipate some needs within the next 12 months, then you could purchase the equipment before year-end to take advantage of any favorable tax depreciation.

Financing is more readily available during good economic times, too, especially if your business and personal debt are low. At the very least, if you expect to purchase or repair equipment in the next couple of years, apply for an appropriate line of credit. You don’t have to use it until you need it, and your healthy finances now will look good to lenders.

Analyze and Monitor Business Operations

Accountant analyzing financial chartsDuring healthy economic times, business owners can invest in just-in-time delivery processes to manage their inventory costs or they can negotiate discounts on large materials purchases. These are just a couple ways to analyze current expenses and look for ways to reduce them where possible.

At the same time, monitor receivables carefully and adjust credit terms if it appears that some customers are slower to pay than usual. At least quarterly, do some cash flow monitoring by reviewing credit terms with vendors and customers and making adjustments if necessary.

Work on New Business Opportunities

By speaking to your advisor at MFB about year-end tax planning, business forecasting and even estate planning, we may identify other opportunities for growing your business value. It could come in the form of diversifying your business offerings, dealing with personal debt or doubling your line of credit to invest in research and development.

Change Entity Structure

If your business is currently an LLC or partnership of a certain size, talk to your CPA about the advantages of changing your entity structure to an S Corporation. For example, the Qualified Business Income (QBI) deduction allows S Corps to increase wages and receive a pass-through deduction. And, S Corps may have a tax incentive to give out bonuses before year-end rather than waiting for final sales numbers.

For more ideas on recession-proofing your business, contact Gene Walbroehl, CPA, gwalbroehl@mfbcpa.com or (631) 537-2300.

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