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As a part of your monthly bookkeeping, Bench prepares three financial statements for your business: the income statement, balance sheet, and cash flow statement. These financial statements provide valuable information about your revenue, expenses, assets, and liabilities that help you make changes to give your business long-term security.
Don’t just use financial statements to file your income taxes. You can also use them to recession-proof your business so that you can be ready to weather any economic storm.
Income statement
The income statement shows you how profitable your business was over a given period of time. It shows you key metrics such as your revenue, expenses, and your profits or losses. These metrics make planning ahead easier by helping you understand your past.
The first metric is your revenue, which is the main way that cash comes into your business. When preparing for a recession, it is important to focus your sales efforts on targeting customers that have consistent demand—even in a recession. Bench’s income statement can help you identify your revenue drivers and track them over a period of time.
For example, say you’re testing out a new sales or marketing initiative in a quarter. Using the revenue ledger under your income statement in the Bench App, you can quantify the performance of your initiative by measuring its impact on your revenue. This can help you figure out what’s really working for your business. You can also use the average revenue from previous quarters as a baseline against which you can compare the performance of your new sales or marketing initiative.
The second metric is your expenses, which can be divided into fixed and variable expenses. Think about your fixed expenses as the recurring costs of simply keeping your business operating like rent, insurance, and utilities. These costs stay the same month to month and aren’t affected by your production volume or sales volume. Your variable expenses, like labor or cost of goods sold, vary with how much business you’re doing. When preparing for a recession, you should take a look at your fixed expenses and identify ways to tighten them. Minimizing fixed expenses is important when you’re unsure how much money you will bring in every month, especially during a time of economic uncertainty. When you know your fixed costs, you know the minimum you need to earn to keep your business going which simplifies your future planning.
Further reading: Fixed vs Variable Costs (with Industry Examples).
Variable costs are harder to predict than fixed costs, but they’re still important to monitor. Eliminating unnecessary variable costs can help you save cash which can then be allocated to an emergency business budget.
The third metric is your profits, the most important metric of all. You can sell more as a business, but won’t end up with any profits if your margins are low. Margins are the difference between the money generated from a sale and the costs of fulfilling that sale. When preparing for a recession, look for ways to improve your margins by increasing your prices, upselling to customers, or cutting costs in a way that you save a bit on every sale. Experimenting with these tactics before cash is tight helps you understand what are the sustainable practices unique to your business that maintain a steady profit.
Balance sheet
The balance sheet is a snapshot of your business finances at a point in time. It tells you about the assets you own, the liabilities you owe, and the equity in your business.
When preparing for a recession, take a look at your balance sheet to determine how much debt you owe and form a business budget that helps you pay it down sooner. Debt payments are fixed costs, so having higher debt will increase the minimum you need to earn to keep your business running in an economic downturn. One important caveat—some lenders impose prepayment penalties if you make payments early. So before you pay off that loan, check whether your lender allows for early payments without penalties.
Generally, a recession is preceded by a surge in interest rates, so if you have a loan that charges variable interest, your interest payments may increase over time. This also makes taking on new debt entering a recession more expensive. When interest rates are rising, it’s better to focus on minimizing your debt now rather than look for new borrowing opportunities in the future.
Further reading: A How-To Guide for Creating a Business Budget
Recessions notoriously slow down a business’s cash inflow—the same cash you use to pay down debts to avoid penalties and extra interest. The good news is a recession is generally followed by falling interest rates. If you pay down existing debt now to weather the downturn, you can take on cheaper debt at lower rates down the line.
Cash flow statement
The cash flow statement tells you how much cash you have on hand for a specific period. In particular, it provides you with information about the cash coming and going from your operations, investing, and financing.
This sounds similar to an income statement, but here’s an example of how they are different. Say you get a new business credit card, and start racking up expenses on it. Your income statement will immediately reflect the expenses made on your credit card. However, your cash flow statement measures the actual outflow of your cash and wouldn’t reflect these expenses until after you pay your credit card bill. As such, it gives you a more holistic and accurate picture of when your money is coming in and going out.
Cash flow is especially important to monitor during a recession when the inflow of cash may be slower than the outflow of cash. With less money to count, analyzing your cash flow statement will give you a detailed picture of how much cash is really in the bank and how you ended up with your current cash balance.
If your cash from operating activities is negative, it means that your business lost money through day-to-day operations. Find ways to increase cash inflow by negotiating quick payment terms from your clients, incentivizing early payments, or penalizing late payments. You can also decrease cash outflow by cutting unnecessary spending or taking discounts for bulk purchases if you have the money to do so.
If your cash from financing activities is positive, it means that cash is flowing into the business through loans or other financing activities. If your cash flow from financing activities is a negative amount, it’s a good sign that you’re paying down debt.
If your cash from investing activities is positive, it means that you’re selling off long-term, capitalized assets or inventory. If it’s negative, it means that you are acquiring long-term assets or inventory. Instead of spending cash on purchasing larger equipment, consider leasing equipment for smaller monthly payments that do not eat up your cash reserve.
You can request a cash flow statement from your Bench bookkeeper to better understand trends in your cash flow patterns. This can help you spot cash flow swings ahead of time which is especially useful when preparing for a recession as you can plan ahead of time for when the inflow of cash typically slows.
If you’re unsure of how much cash you’ll need - generally, it is recommended that you have a cash balance of at least three to six months’ worth of operating expenses. You can use Bench’s cash flow statements to create a cash flow forecast which can help you map out your upcoming income and expenses to make sure you have enough cash on hand to pay your bills throughout the recession.
Further reading: Cash Flow Forecasting: A How-To Guide (With Templates)
Maximize your tax deductions
As you prepare for a recession, the last thing you want is a heavy tax burden that takes up a large chunk of the business’s cash. This is where Bench can help. Our bookkeepers and tax experts help you maximize your tax deductions and take advantage of government programs that can reduce your tax liability. We’re also here to help you understand how these government programs impact your taxes.
