Sick of gloomy economic news? Me too. Inflation, fuel prices, interest rates, currency fluctuations, it all sounds a bit grim. It can be a bit like hearing about a winter storm barreling toward us. But just like a bad weather forecast, this grim news can provide us with some forewarning of choppy economic times ahead. As the old saying goes, forewarned is forearmed, so what can you do to prepare?
Understand your cost base. In a business, this means knowing how much cash it takes to run the business on a weekly basis – how much money needs to come in just to keep the doors open. This includes understanding what is discretionary vs necessary or more simply, where could you cut back without sacrificing your offering. The same is true for households – how much do you need to cover the necessities?
Know where you’ll get cash from in the event of a shortfall. There is nothing more stressful than not being able to make payroll, or for key supplies to be held up because of non-payment. Financial stress has been shown to have a negative effect on IQ – being strapped for cash makes you dumber. Be prepared in advance – if your business needs a short-term injection of cash in a hurry, where will it come from? Should you have an overdraft facility in place? Do you have access to another line of funding? Again, the same is true for individuals – if you need cash for something unexpected, where will it come from? Knowing in advance greatly reduces the stress if it turns out to be necessary.
Review your debt. Is your business carrying too much debt? And is it the right sort of debt – are you using short term debt (credit cards, over drafts) to fund working capital? If so, now is a good time to explore rolling that into a term loan. And speaking of debt, total personal credit card balances have gone from $2.39 billion in July of 2000 to $5.46 billion in July of 2022. While this is down a scratch since the pre-covid highs, it’s still quite a chunk of change! If you are contributing to that more-than-$5-billion balance, now might be a good time to chew it down.
Think in advance. There is almost nothing that you can’t prepare for in advance. But often we shy away from thinking about the nasty stuff because, well, it’s nasty. However, the more that you can think through scenarios ahead of time – and the appropriate responses – the more likely you will be in control in an adverse event. Understanding and analysing risk is a cornerstone of good governance and just as applicable to your personal life as it is in business.
Best of all, even if the economy steams along without interruption, the above actions are good for business and good for your own financial position.
If you need some help getting your financial house in order, get in touch.