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17 May 2024

A smart entrepreneur is prepared for both economic downturns and upswings

Upswings and downturns are the basic laws of economy. This means that after a long upswing, poorer times are almost certainly ahead – and vice versa. However, you need not just meekly submit to economic fluctuations, because with good foresight and planning, you can prepare for and even benefit from them. 

Finland’s economy has weakened over the last few years, when the long period of zero interest rates came to an end and interest rates started to rise. At the same time, inflation has eaten away at the purchasing power and desire of both consumers and companies. And Finland is not the only country going through a recession – the effects of the uncertain global situation with the ongoing wars and conflicts can be seen in the entire euro area. 

Rising interest rates and the inflation made the housing market grind to a halt, and the entire construction industry died down quite quickly as well. The lack of construction projects led to huge ramifications throughout the subcontracting chain.

Preparedness starts with identifying risks 

If you want to be prepared for economic fluctuations, you need to be able to identify the risks of your business. 

  1. Is your customer base diverse enough? If more than 30% of your company’s turnover comes from one customer, you should consider how to increase the share of other customers.  You should also consider how diverse your customer base is in terms of different fields. If the construction sector is quiet at the moment, there are other, more vibrant fields to consider.
  2. Have you tidied up your warehouse? You should not tie up too much capital in your warehouse, especially if your funds are low due to weak economic demand. You should also consider whether the goods and materials you have in stock are still saleable.
  3. Are you using your own funds to finance your customers? When the economy is doing poorly, it is important to focus on ensuring that the cash flows smoothly and that the accounts receivable are paid on time. This means that you should not hesitate to send payment reminders to your customers. You should also not agree to excessively long payment terms. Keep an active eye on the cash flow and react to even the smallest warning signs. Remember that bankruptcies are always preceded by a liquidity crisis.
  4. Time to tighten your belt? Doing good business is the key to a good economy. But when sales are poor, every company should take a look at their cost structure. When you look at your company’s fixed costs, can you find any unnecessary expense items that eat away at your profits and put a strain on your cash reserve? 

A new economic boom is on the horizon, are you ready?

It makes sense to prepare for a decrease in demand, but preparing for an increase in demand is just as important. Upswings and growth also take up resources. 

  1. The old adage that you have to spend money to make money holds true here. Growth requires money and puts a strain on your cash reserve. That is why you should have a plan also for economic upturns and increased demand.
  2. Labor is more readily available during bad economic times. And since providing training and orientation to new employees takes time, you should know how to properly time the hiring of new employees. If you have the resources for it, you should take care of any recruitments well in advance.
  3. When your business is doing good, you should think about the future and build up a buffer for bad days. Create a plan for how and where to accumulate the buffer. 

Keuke is there to help you in various ways in matters related to finances and personnel. Make an appointment for a free consultation! 

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