As living costs continue to rise worldwide, there’s no doubt that a global recession is looming. Essential commodities and services are getting harder to afford, making life difficult for everyone. The Philippines is no exception.
The country’s economy grows weaker as inflation continues to rise, even reaching 7.7% in October 2022. While ordinary Filipinos can do so little to combat this, you could still brace yourself and prevent your business from becoming a casualty.
With the incoming recession, small business owners in the Philippines can minimize its effects by focusing on specific business operations. In particular, this article focuses on the importance of bookkeeping for business and how it can help you survive a recession.
How Can a Recession Affect Your Business?
Recessions are periods of economic decline typically resulting in hunger, job loss, and a decrease in customer spending. At the root of the impending recession is the COVID-19 pandemic, which still has its hold on the world’s economy.
Small businesses, in particular, are heavily affected by recessions. This problem is significant given that small and mid-size enterprises (SMEs) comprise roughly 99% of companies operating in the country.
To identify how to survive a recession, you must first acknowledge its possible impacts on your business.
During economic crises, consumer demand for your products and services may decline, resulting in reduced profits. It’s a major problem for Philippine SMEs without large cash reserves as it may cause mass business closures.
Reduced cash flow
For business-to-business (B2B) companies, payments go unsettled when clients go out of business. Remember: your clients are affected by recessions as well. With no money to spend, many of your business’s accounts receivables might be delayed or unpaid.
Drop in product quality
As manufacturing processes slow down and profits decline, you might consider reducing your product quality. Shrinkflation is a common practice, often observed during economic crises when businesses downsize products to maintain prices.
It’s common for businesses to terminate employees during recessions to reduce labor costs. During the pandemic recession in the Philippines, unemployment rates rose from 5.3% in January 2020 to 17.7% in April of the same year.
6 Ways Bookkeeping Can Help Your Business Survive a Recession
Economic downturns are damaging to both large corporations and SMEs alike. However, innovative recession-proof business ideas can help minimize the impact. For instance, intensifying your bookkeeping processes might help you survive the crisis.
Below are specifics ways how bookkeeping can help your company stay afloat during these trying times:
Reduce your fixed costs
It can be difficult to ascertain your profits during a recession. What is sure, however, are your company’s fixed costs. Their predictability allows you to track them accurately in your books, making financial planning easier.
Evaluate your fixed costs to identify opportunities that can reduce overhead. For instance, during the early months of the 2020 pandemic, the Bureau of Internal Revenue (BIR) provided repeated extensions to tax filing deadlines, helping businesses manage their list of financial responsibilities.
Trim your variable expenses
Another cost you need to reduce is your business’s variable expenses. Although these are more unpredictable than fixed costs, you can trim and control them as they occur.
For instance, buying items in bulk can help you minimize production costs if you’re working in retail. However, avoid cutting back on expenses essential to your business functions, such as worker healthcare coverages, bookkeeping services, and marketing campaigns.
Refinance your debt
During economic downturns, central banks lower rates to stimulate economic growth, resulting in reduced interest. Leverage this by refinancing your high-interest debts with loans that have lower rates. Doing so can decrease your monthly payments and save you money in the long run.
Creditors might be extra selective about lending money to avoid risks during recessions, especially to SMEs. They might require higher down payments or limit access to certain types of loans.
Stay on top of collections
Because customers struggle financially during recessions, they might have difficulty settling accounts receivables. To adjust for these circumstances, consider changing your payment terms. You can provide additional payment methods or staggered options to make settlement more accessible.
Remember that your business’s health should still be your top priority. You can opt to cut transactions with clients who have become liabilities to your organization.
Build a cash reserve
Crises may spring up unnoticed, so your company must prepare. While a global recession is still impending, you should set aside a portion of your profits to brace yourself for the impact. Reserves are essential for SMEs who may find it challenging to tap lenders for cash.
As a rule of thumb, create an emergency fund that covers up to six months of essential business expenses such as payroll and utilities. However, given the Philippines’ two-year pandemic lockdown, setting aside at least a year of cash reserves is a safer choice.
Make decisions backed by data
While recessions can be taxing, it’s crucial not to let them get the better of your financial thinking. Despite the unpredictability of crises, you still have your books of accounts to rely on. Maintaining accurate ledgers is a must with or without crises, as poor record-keeping is a common bookkeeping mistake that spells trouble.
It’s vital to base your decisions on your company’s financial trends and forecasts. The slightest inaccuracy in your books can affect your other finance functions, such as your tax work, which might negatively impact your business, further stressing the importance of bookkeeping.
Leverage Bookkeeping During Recessions
A recession is seemingly inevitable, given the rising inflation rates in the Philippines. Preparing for the worst makes a big difference when running a business, and staying on top of your bookkeeping processes is an excellent place to start.
Your finance ledgers can serve as your guide to navigating an uncertain world. Luckily, you can skip the guesswork as our experts at CloudCfo can help you during these turbulent times.
CloudCfo is an accounting firm for startups and SMEs that provides cloud accounting services in the Philippines to help you build and scale your finance functions. Contact us today for more information on how to lift your business with results-driven services!