The majority of both Wall Street and Main Street believe we’re heading towards a recession, with high inflation and supply chain issues just adding to the negativity. For growing businesses who aren’t sure how to prepare ahead of time, here are 10 tips that could make all the difference in preparing your company for an economic downturn.
1. Gain visibility over your workforce cost
Your total workforce cost is an important number to be aware of and in control of, so make sure you have the data on your burn. To make this happen, you need all data on payroll, contractors and consultants in a single dashboard. Don’t forget it’s not just gross salaries, you need to remember the 30%-60% difference when you factor in total employment costs like benefits and employer tax requirements.
2. Adapt your PTO carry-over policy…
This is a non-mandatory policy which is easy to change, shifting to a “use it or lose it” approach. This could slow down burn rate by as much as 1-2 months, which is ultimately a win for the whole company, employees included. While you might get some negative pushback from employees, explain that you’re all in the same boat together, working as a team to win against a difficult situation.
3. … Or even reduce PTO company-wide
The drastic change you can make to the way you handle Paid Time Off is to reduce the PTO entitlement across the organization by 1 or 2 days each year. Of course you need to make sure this doesn’t push benefits below the legal entitlement for employees in each location. 1 or 2 days is not a lot of vacation to lose for employees (remember, we’re all in this together!) and yet for a company with 500 employees, it can save $500k annually.
4. Set salaries based on current benchmarks
Salaries increased very quickly as the pandemic receded – it’s now a time where they are decreasing rapidly as well. You probably pushed yourself to the limit to offer competitive salaries to new hires over the past 18 months, but in turn that pushed you out of your comfort zone, and that’s not a great place to be on the verge of a recession. When onboarding new talent, step back.
5. Create an efficiency metrics board
No more guessing games around how your business is performing. Make sure you’re tracking the important metrics. For example, what’s your Customer Acquisition Cost compared to Customer Lifetime Value? What’s your gross margin overall? Don’t forget to think about burn rate. Ask yourself, how many months would it take to deplete your cash resources if the business was in a loss-making situation? Then look to stretch this number as large as possible.
6. Look into a line of credit or a loan
Now that you have a metrics dashboard… How’s that burn rate looking? If your cash won’t take you for the next 24 months, now’s the time to set up a loan, get some working capital and even establish a line of credit. This process doesn’t happen overnight, it can take 2-4 months to dot the i’s and cross the t’s so it’s definitely not worth waiting until the situation becomes worse. Remember, you don’t have to use a line of credit, but you’ll be sorry if you need one and you haven’t planned ahead of time.
7. Get serious about collections
Face facts, in a recession you’re likely to lose clients. Make sure you’re tracking collections and managing billing extremely carefully so that you aren’t left with bad debt when customers walk out the door. Who is not up to date on subscriptions? Who has upgraded service but not adapted their quarterly payments? If you’re owed money, now is the time to get serious about collecting.
8. Consider your global expansion options
Whatever plans are on the roadmap, you might need to think again about your global expansion choices. Where can you build tomorrow’s team more efficiently, even if it wasn’t on the existing agenda? Think about government funding schemes you could take advantage of, and make sure to act quickly before municipalities make changes to prepare themselves for a recession, too
9. Think worst-case… What are your termination obligations?
No-one wants to think about the disaster scenarios, but you may realize that you need to reduce the burn by making redundancies and ending employment contracts, and that tough decisions need to be made. It’s important to talk it through ahead of time and understand the impact of these terminations. This includes your legal obligations in every country, which could be notice periods, severance liability, and the legal process of termination in-region.
Above all, make sure to stay calm, and make smart and strategic decisions, not knee-jerk reactions. Stay transparent to your own team and to employees across the business. They are your partners in both the ups and downs, and secrecy can cause a hit to morale and productivity – the last thing you need! If a recession does impact your business, you’ll need the help of everyone in the business to get through the rough patch, and safely through to the other side.
About Papaya Global
Papaya Global offers a total people, payroll, and payment management solution supporting all types of global employment (payroll, EoR, and contractors) in over 160 countries. The automated, cloud-based SaaS platform provides a unified solution, from onboarding to ongoing management and cross-border payments. The platform integrates with all existing HRIS management tools, provides real-time business intelligence, and eliminates errors. It gathers all employee information into one place, creating a highly visible system for tracking payroll spending. The platform ensures GDPR and SOC compliance to maintain the highest standard of security.