How CPAs can help small businesses prepare for a recession

By Denise Deveau
Jan 26, 2023
Photo credit: shapecharge/E+/Getty Images

Accountants are well equipped to provide advice and assistance on everything from cash flow analysis to renegotiating with suppliers

With a recession being considered a possible risk for 2023, many small business owners are expressing concern. Kevin Meyler, CPA, national practice leader with BDO’s business restructuring turnaround services group in Calgary, says he is encouraged by the increase in the number of business customers contacting them to take proactive steps. “They’re seeing continuing rises in interest rates and inflation and want to prepare for the [potential] impact they will have on their business.”

Here are some of the key areas where CPAs can help business clients get recession-ready.

Start with a cash flow analysis and forecasting

This is the first step for any business, says Jean-Marie Chan Kin, CPA, founder/principal, Money Coach JM in Toronto. “You really need to look at inflows and outflows to determine how best to manage them.”

“We tell companies a million times that cash is king in a recession,” says Meyler. “We really encourage them to do both short- and long-term cash flow forecasts to determine the impact of different scenarios—what if rates go up two per cent or sales drop 10 per cent? What would that look like for the business?”

What-if scenarios don’t have to be scientific, says Chan Kin. “You need to lay out a best case, a realistic case, and a worst case scenario. In that way you know they will always have a plan. Hope for the best and plan for the worst.”

Find opportunities to increase profitability

A deep dive into operations can help businesses understand where they can free up cash and increase profitability, says Meyler. “An independent assessment can help a business refocus on areas that are doing well and what is growing. We often recommend a segmented analysis of a company to determine whether one division that is making money is masked by another doing poorly. Or there may be idle or redundant assets or business segments that can be sold to free up cash.”

“Tighten up capacity where you can,” advises Troy MacDonald, CPA, national advisory leader, Grant Thornton in Toronto. “For example, if you are in manufacturing and have two shifts running through the facility, you may be able to go back to one even if it means shedding a bit of business. Sometimes you need to shrink your top line to protect your bottom line. It might also be an opportune time to look for ways to get better value for existing office space or to acquire another .”

Review debt profiles

At a time of higher interest rates and tight cash flow, businesses may have to explore debt restructuring opportunities, says MacDonald. “You might need to extend amortization periods to build up cash levels. If you are having to renew or take on more debt, you may not want to lock in long-term as things may flatten or come down in 2024.”

“CPAs can help by reviewing credit agreements and determining whether their customers have appropriate loan sizing and banking relationships,” says Meyler. “They should be looking at whether they have loan availability right now and if it is adequate to get them through a recession. It’s a lot easier to get new financing when you don’t need it.”

Reduce accounts receivables risk

MacDonald says clients need to put some thought into their credit risk. “You have to be careful with the credit you give to your customers and be more aggressive with collections. Make sure you don’t get overexposed because you don’t want another business to take yours down.”

Also, do a review of your client base. “You may want to get rid of customers that are not profitable or are dragging behind with their payments ,” says Meyler. “If they don’t have the cash to pay the bills, it’s no good getting money in after the fact. It’s tough to make decisions around that if sales are good, but if a customer is at risk of not paying, chances are they are having problems as well.”

If they prefer to keep the customer, businesses can simply be more careful, he adds. “You might want to switch their terms to cash on delivery or make them pay a deposit before working on their project. It might help to offer a small discount for early payment.”

Talk to lenders and suppliers

If a business is running behind, there may be an opportunity to renegotiate with creditors and suppliers, says Meyler. “Remember they don’t want you to fail either, as they have a vested interest in having their customers go forward.”

“Communicate a lot with lenders,” says MacDonald. “Make sure you stay close to them. If you are proactive with that, and make sure they know what is going on, there won’t be surprises when things get difficult.”

It’s also a good time to negotiate better terms and pricing with key suppliers, he adds. “We are in a buyers’ market right now.

As Meyler notes, “You can’t change the economy. All you can change is how you react to it. That’s why being proactive is so important.”

Denise J. Deveau is a Toronto-based freelance writer specializing in business and technology related topics.

Originally published by CPA Canada's news site.

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