Modern finance teams face a multitude of challenges. The rising threat of inflation, potential recession, and other economic factors pose significant risks to businesses of all sizes. These challenges can lead to higher expenses, less access to capital, declining cash flow, and make accurate forecasting more difficult for teams, among other issues.
This blog explores the risks of inflation and recession, along with ways finance teams can mitigate them and recession-proof their business. Implementing these strategies can help businesses remain resilient and thrive in the uncertain economic climate.
Key takeaways
- Economic downturns create both challenges and opportunities for businesses that implement the right strategic approach.
- Cash flow management and operational efficiency are critical foundations for recession-proofing your business.
- Digital transformation and automation help companies do more with less during resource constraints.
- Strategic resource allocation across marketing, talent, and partnerships can position your company for post-recession growth.
The state of business today: CFO concerns and challenges
The most recent State of AP Report found that four in five finance professionals believe their organization requires more automation to be effective, highlighting the growing recognition of technology’s role in navigating economic challenges.
The current economic climate poses significant challenges for finance teams across various industries. Inflation and the potential for a recession are top concerns for CFOs, who must guide their firms amidst these financial risks and ensure business continuity. Inflation, in particular, is a growing threat to businesses worldwide. Companies face higher expenses as prices continue to rise, making it difficult for them to maintain profit margins with their existing pricing strategies. Inflation also increases the cost of debt by raising borrowing costs, thus reducing teams’ access to capital.
A potential recession is another challenge for CFOs this year. It has many teams worried about declining sales and profits, and the possibility of disruptions to normal operations and output levels. Stricter credit conditions and declining cash flow can further exacerbate the recession’s impact, making it harder for companies to meet financial obligations and maintain healthy vendor relationships.
Given these concerns, finance teams must take proactive steps to manage financial risks and prepare for potential economic downturns. The following sections will explore the risks of inflation and recession, along with strategies finance teams can adopt to improve efficiency and combat these challenges.
What are the risks of inflation?
Inflation poses several challenges that impact a company’s financial stability. The following are just some of the risks:
- More expenses
- Higher cost of debt
- Difficult forecasting conditions
More expenses
As prices rise, businesses are forced to pay more for goods and services. Teams must then take action to find ways to protect their profit margins.
Higher cost of debt
Inflation makes it more expensive for companies to borrow money. Reducing access to this capital often forces teams to scale back their investments in growth opportunities.
Difficult forecasting conditions
Inflation often adversely affects companies’ ability to accurately forecast cash flow, future expenses, revenues, and profits. This means teams are less able to make informed business decisions and manage financial risks effectively.
What are the risks of a recession?
A recession has a significant impact on businesses. It often leads to:
- Declining sales and profits
- Stricter credit conditions
- Shrinking cash flow
Declining sales and profits
A recession typically brings declining demand for goods and services, resulting in reduced sales and profits for businesses. This prompts layoffs, leaving teams understaffed and unable to maintain normal operations and output levels. This can be particularly problematic for back office positions, which are often first on the chopping block to reduce operating costs.
Stricter credit conditions
Similar to inflation, credit conditions often become stricter during a recession and thus make it harder for businesses to access capital.
Shrinking cash flow
In a recession, customers may take more time to pay, leaving teams with less cash on hand. This impacts teams’ ability to pay suppliers on time and can ultimately threaten vendor relationships, jeopardizing a company’s ability to maintain a reliable supply chain.
9 strategies to recession-proof your business
To remain resilient in the face of economic uncertainty, businesses must take proactive steps to manage financial risks and prepare for potential economic downturns. This section explores 9 strategies to help finance teams recession-proof their business:
- Monitor and manage cash flow
- Diversify your customer base
- Improve efficiency with digital transformation & financial automation
- Focus on cash-generating activities
- Strengthen relationships with key vendors
- Improve financial forecasting with better analytics
- Create contingency plans for various scenarios
- Retain and develop talent
- Strategic M&A and partnership opportunities
1. Monitor and manage cash flow
Finance teams must develop a method to monitor and manage cash flow to ensure that the company has enough cash on hand to meet its financial obligations. Monitoring enables teams to identify problems early on, rather than after they have grown. Some additional cash flow management steps to take include:
Mitigate late payment fees
Late payments place strain on supplier relationships and often result in additional fees. Teams can mitigate these late payment fees when they send automated reminders to invoice approvers, leverage AP analytics, track DPO, and use digital payment methods for faster processing.
Take advantage of early payment discounts and rebates
Many vendors offer early payment discounts and rebates as an incentive for customers to pay promptly. By taking advantage of these discounts, finance teams will reduce costs and improve cash flow.
Reduce duplicate payments
Duplicate payments are a costly and time-consuming line item for businesses. These occur when invoices are sent via multiple means, customer names appear twice in the ERP, or due to human error. With the right tools, such as an AP automation solution, teams can reduce duplicate payments for better vendor relationships and more efficiency across the AP team.
2. Diversify your customer base
During a recession, businesses that rely heavily on a single customer or industry are more vulnerable to the impact of economic downturns. Therefore, diversifying your customer base is essential to reduce this risk. Finance teams should work with sales and marketing teams to identify and target new customer segments, expand into new markets, and develop new products or services.
Leadership teams may also consider multiple approaches to attracting and retaining customers during a recession, including: implementing loyalty programs, improving customer service, and offering competitive pricing. Focusing on building long-term relationships with customers will create a stable customer base and ultimately recession-proof their business.
3. Improve efficiency with digital transformation & financial automation
Finding ways to reduce costs and improve efficiency is critical. One way finance teams can achieve this is by leveraging digital technologies to automate financial processes. Finance teams can reduce manual processes, improve accuracy, and reduce costs simply by automating processes such as accounts payable, expense management, and invoice processing.
MineralTree, for instance, offers an all-in-one accounts payable automation solution that allows finance teams to streamline the end-to-end accounts payable processes, reduce manual data entry, and speed up payment processing. With this AP automation solution, finance teams can eliminate paper-based processes, reduce the risk of errors, and gain better visibility and control over the accounts payable process.
In addition to accounts payable automation, finance teams can also leverage other digital technologies such as online banking, digital payment systems, and cloud-based accounting software to streamline financial processes and reduce costs.
4. Focus on cash-generating activities
Finance teams must work with other departments to identify and prioritize activities that generate cash. One effective method is to analyze and reduce inventory levels then sell slow-moving or obsolete items. This will generate cash while reducing storage costs. Another option is to sell off non-core assets such as excess real estate, vehicles, or equipment.
5. Strengthen relationships with key vendors
Supply chain disruptions impact a company’s ability to operate efficiently. Therefore, finance teams should work to build and strengthen relationships with key vendors to solidify their supply chain.
One way to do this is to pay vendors on time and communicate proactively if there are any payment delays. Companies can also work to negotiate favorable payment terms, volume discounts, and other incentives to reduce costs and improve cash flow.
MineralTree’s Accounts Payable solutions automates the invoice approval and payment process for finance teams, reducing manual data entry and errors. This helps ensure that invoices are paid on time.
6. Improve financial forecasting with better analytics
Finance teams use analytics tools to analyze historical data, identify trends, and predict future financial performance. But in order for the analytics to be helpful, teams first need data that is both up-to-date and accurate.
There are several analytics tools that improve financial forecasting. These tools range from simple spreadsheets to more advanced business intelligence and data analytics software. The right tools provide a better understanding of a business’s financial performance, identify areas for improvement, and enable informed decisions about resource allocation.
MineralTree’s robust set of AP analytics tools provide real-time visibility into accounts payable performance, enabling finance teams to track spending, identify cost-saving opportunities, and make informed business decisions. Additionally, information is available for analysis immediately upon invoice capture. With the combined power of human review and OCR technology, our solution offers 99.5% accuracy when capturing line item invoice data, making it a core tool for those looking to increase their AP forecasting abilities.
7. Create contingency plans for various scenarios
Businesses face a high degree of uncertainty during recessions, making it challenging to accurately predict the future. Therefore, it’s essential to create contingency plans for various scenarios and prepare for unexpected events.
Finance teams should first work with other departments to identify and prioritize potential risks, such as supply chain disruptions, decreased demand for products or services, and economic downturns. After identifying potential risks, teams can develop plans to effectively manage those areas.
Contingency plans may include measures such as reducing costs, diversifying the customer base, negotiating new payment terms, and increasing cash reserves. To prepare for unexpected events, teams should also consider stress testing their business operations. Stress testing involves simulating various scenarios to identify potential vulnerabilities and develop plans to manage those vulnerabilities.
8. Retain and develop talent
In an environment where 83% of senior leaders report an accounting talent shortage, focusing on strategic talent management instead of cost-cutting through layoffs can better position your organization for stronger post-recession growth. Finance teams should consider the following:
- Find and support top employees who create the most value.
- Focus on cross-training to make your workforce more flexible and resilient.
- Consider performance-based compensation structures that align with company goals.
- Develop leadership capabilities to navigate uncertainty and maintain team morale.
- Consider exploring flexible work arrangements that can lower overhead costs while still maintaining productivity.
For example, AP automation solutions free up finance team members from manual tasks, allowing them to develop higher-value skills that make them more valuable to the organization during challenging times.
9. Strategic M&A and partnership opportunities
Recessions often create unique opportunities for well-positioned companies to strengthen their market position through strategic acquisitions or partnerships. Finance teams should:
- Identify undervalued assets or distressed competitors that could provide strategic advantages.
- Explore joint ventures that share risk while expanding capabilities.
- Consider vertical integration opportunities to secure supply chains.
- Assess technology acquisitions that may enhance and accelerate digital transformation efforts.
- Develop a framework for quickly assessing potential deals as they arise.
For example, cash flow forecasting provides the real-time visibility and accurate forecasting needed to evaluate potential acquisition targets and partnership opportunities with confidence.
Recession-proof your business with MineralTree
MineralTree’s AP automation solutions directly address many of the challenges outlined in this blog. By streamlining invoice processing, optimizing payment timing, strengthening vendor relationships, and providing real-time financial visibility, our platform helps finance teams navigate economic turbulence with confidence.
In the latest State of AP Report, where finance professionals consistently rank AP as their #1 automation priority and where less than 20% of organizations have fully automated their AP processes, there’s a clear opportunity to gain a competitive advantage through digital transformation.
At MineralTree, we understand the challenges that businesses face during a recession, and we’re here to help. Schedule a demo today to learn more about how MineralTree recession-proofs your business.
Common questions about recession strategies
Tl;dr? If you’re short on time, the frequently asked questions below provide a quick snapshot of how your business can thrive during an economic downturn.
What industries are most recession-resistant?
While no industry is completely immune to economic downturns, sectors like consumer staples, healthcare, utilities, and essential services typically experience less volatility during recessions. However, companies in any industry can improve their resilience by implementing the strategies outlined in this article.
How can AP automation help during a recession?
AP automation reduces manual processing costs, captures early payment discounts, eliminates late payment fees, and provides real-time visibility into cash flow. These benefits are particularly valuable during economic downturns when efficiency and cash management become critical priorities.
When is the best time to implement recession-proofing strategies?
The ideal time to implement recession-proofing strategies is before a downturn occurs. However, many of the approaches outlined in this blog, such as improving operational efficiency, strengthening vendor relationships, and enhancing financial forecasting, deliver benefits in any economic climate and can be implemented at any time.
How do successful companies balance cost-cutting with growth investments during a recession?
Successful companies see cost-cutting not as a blanket measure, but as a strategic reallocation of resources. They reduce spending in non-essential areas while simultaneously investing in high-potential opportunities, digital transformation, and customer retention to emerge stronger when economic conditions improve.
