Global economic uncertainty may well lead to recession. However, there’s nothing to fear if corporate management prepares well. Here are a few tips on budget optimisation under the looming economic crisis.
Leading economists estimate the probability of at least a “mild” recession occurring in 2022 as 47.5%. Even optimists agree recession could happen within the next 12 months. Chances rise along with inflation and unabated geopolitical tensions. Thus, business executives across the globe should face the upcoming crisis well-prepared.
Staying afloat requires early, decisive actions
The experience of previous recessions shows that early actions are critical to surviving the downturn. The first thing to consider is constantly rising inflation. It will significantly increase input costs. Besides, the cost of labour will also increase. It is already hard to find and retain high-quality talent. A significant rise in living costs would likely require salary increases. Therefore, company management must wisely allocate resources and invest in growth today.
Few organisations regain their pre-recession growth levels and sustain them in post-recession years. In times of crisis, old strategies typically don’t work. Thus, company executives face strategic challenges to solve. Many of today’s fundamental decisions depend on the company’s digital strategy. In particular, re-formatting your business to withstand the recession might require enhanced IT investments.
Cut costs effectively
Cost reductions will be on the agenda of any organisation that prepares for recession. Every entrepreneur should be able to distinguish essentials from extravagances that are eating away at profits without stimulating growth. For instance, critical times usually call for reducing inessential office supplies or cutting down personal travel allowance. However, impulsive actions to cut costs can have unintended consequences in the long term. On the contrary, proper cost optimisation can fuel growth, investment, and innovation.
Firstly, you should set realistic targets for your cost-cutting scenario. Don’t prioritise cost reduction over team motivation, customer loyalty, or growth opportunities. This way, you’ll only lose important value sources. Moreover, too aggressive cost cutting can drain funding from high-impact innovation projects or ESG initiatives. This strategy may help in the short term, but will impact your organisation’s competitiveness and brand integrity.
Another crucial aspect of cost reduction is its sustainability. Many businesses start well, but fail to maintain their cost-cutting strategies for extended periods. That happens because they apply momentary remedies instead of planning and making wise spending decisions for the future’s sake. For instance, cutting down expenses aimed at digital acceleration is a mistake that hinders total budget optimisation and customer experience. Although it might help a company survive for a few months, such limitations ultimately impede corporate vitality.
Diversify your revenue sources
Whether your business caters to individuals or institutional clients, relying on few revenue sources in times of recession is risky. Therefore, you should study your customer base carefully. If a large part of your revenues (20-30%) comes from a single client or top three buyers, try to expand your clientele before it’s too late. Tap other markets, aim your marketing efforts at alternative target audiences, establish new business connections, and add many small revenue streams.
Although some of those initiatives require an upfront investment, you may already have the alternative revenue streams at your fingertips without ever noticing. Identify them by brainstorming everything your brand does and has in place (infrastructure, resources, services, communication). Think about alternative ways to use that, which might benefit your customers.
Consider offering a premium service to your customers. Add a subscription or membership program. This way, subscribers can access exclusive content, special discounts, and access to new products ahead of general release. You’ll get an additional revenue stream.
Augment your existing offering with supplementary products or services. For instance, if you provide financial services like crypto custody or P2P payments, enhance your service value with tutorials. Although some of them may and should be free, you can also create profound educational courses about budgeting or trading on a paid basis.
Perhaps, your company has been doing research in a related industry. Insights and analytics may become an alternative source of revenue too. Monetising even small revenue streams will help you withstand economic uncertainty.
Invest in digital growth
Gartner recommends leveraging digital resources against recession pressure. Heavily investing in IT infrastructure today will give you a head start when the market is down. Therefore, most CEOs focus on digital efforts as a business driver.
Firstly, advanced digital strategy brings constant cost-reduction since many manual processes become obsolete. Besides, it enhances customer experience, thus, increasing brand loyalty. In addition, solid IT infrastructure creates a positive employee experience, critical for engagement and productivity. Last, but not least, disruptive innovations give your company a highly-competitive edge.
Therefore, you must clearly determine your company’s digital ambitions and invest in four core IT capabilities: strategy, governance, architecture and IT delivery. Don’t save on cybersecurity either. Managing the impact of a cybersecurity incident is itself very costly.
At the same time, be careful with splurging. Limited budgets and pressure to invest in disruptive technologies can drive executives to spend on unfavourable terms. Sometimes, purchased technologies require unforseen implementation costs, generate new inefficiencies and fail to meet expectations. That is a waste of your precious budget resources. Thus, choose service providers carefully and clear out all implementation details before making a deal.
Create an emergency fund
Common budgeting rules work for companies as well. Harsh times require a safety cushion. In uncertain economic conditions, your cash flow might dry up, or banks can tighten lending policies. Therefore, an emergency fund would be useful for any business.
However, your target balance will depend on the size of your business, its volatility, revenue and margins. Think about the worst-case scenarios, and check if you have enough savings to cover three to six months’ cost of daily expenses.
Manage your debts
As recession is looming and budgets are tightening, debts tend to compound. Thus, you’d better tend to your debt obligations while you still have cash on hand. If you can’t eliminate all the debt, at least cover your higher-interest loans. Create a repayment plan for other loans. Negotiate loan conditions with lenders, if possible.
Another debt management strategy to consider is debt consolidation. The best option is consolidating several shorter-term loans into one long-term package with a predictable interest rate. However, if your efforts to finish off business debt on your own aren’t bringing any success, you may want to seek the help of a professional debt-restructuring company.
Streamline the marketing budget
Although marketing is important for every business, corporate marketing budgets should be distributed more efficiently ahead of unexpected economic challenges. As marketing budgets have expanded lately, some companies may have increased their investments in efforts to raise awareness. However, in times of economic crisis, initiatives generating immediate returns are more effective.
Besides, companies can also invest in search engine optimisation, including keyword strategy, to more effectively drive customers to brand storefronts, social media handles, and apps. Tailoring communications more effectively is another part of the equation. Take a closer look at targeted emails. Leveraging AI and machine learning would enhance your marketing efficiency.
Finally, inflation and economic uncertainty may make customers shy away from traditional advertising forms that push unnecessary spending. Influencer marketing and user-generated content, on the other hand, seem more credible. Strategic partnerships with creators make product placement more authentic and may generate more sales. Think about livestream shopping and market opportunities it brings. Besides, incentivising users to review products in exchange for a future discount may be more effective and less expensive than paid media at times like this.
Large businesses with broad portfolios of products and services may be investing too much in low-margin product lines that aren’t generating enough revenue to justify marketing costs. Assess spending across products and regions to prioritise funding for high-growth and high-margin campaigns. Automate marketing management to always keep abreast of your budget and its efficiency.
Furthermore, production of reusable, templated marketing content is another way to reduce costs and achieve greater efficiency. Variations of a template help marketers quickly and consistently produce emails, social posts, and banner ads that are targeted to different consumer segments.
Recession may be looming, but there’s still time to prepare and mitigate all the negative outcomes. Businesses that are proactive in managing their finances will strive, regardless of economic conditions. Follow the common budgeting rules and invest in the growth opportunities wisely. This will help your company stay afloat amidst any economic storms.