How to strengthen your balance sheet before a recession

Published on Nov 01, 2022

How to strengthen your balance sheet before a recession

Knowing a recession is likely on the way is causing a lot of stress and concern for business owners. Taking action can help business owners regain control during uncertain economic times. 

Keep reading to learn how entrepreneurs can strengthen their balance sheet now to prepare for the potential upcoming recession. 

What makes a strong balance sheet

Entrepreneurs rely on balance sheets to gain perspective into a business’ total assets. A strong balance sheet provides a valuable forecast tool and helps secure funding.

Understanding how to strengthen a balance sheet helps to look at what a balance sheet needs to have to be strong. 

How to analyze your balance sheet

Now that you know what a strong balance sheet looks like, let’s examine how someone can analyze their balance sheet so they can determine what steps they need to take to strengthen it. 

Tips for strengthening your balance sheet

Once you take some time to carefully analyze your balance sheet, you can determine which areas require improvement. From there, you can make a plan for strengthening your balance sheet. 

Create a cash reserve

To start, it helps to have a cash reserve on hand. That way, if a financial emergency does arise (which can very well happen during a recession), the business has cash available to cover these expenses. Having a cash reserve can also make it possible to take advantage of good business opportunities that require financing. 

Pay down debt

Remember that debt-to-equity ratio we mentioned earlier? One of the best ways to lower that ratio is to pay off debt. It’s also possible to lower this ratio by bringing in more sales, so ideally you’ll have a plan for increasing revenue and paying off debt. It may be possible to sell assets such as equipment or real estate to help improve cash flow and pay down debt. 

Reduce spending

It may be time to relook at the overall business budget and see where it’s possible to cut back on spending and improve cash flow. Evaluate different areas of the budget to see where your business is benefiting the most from spending and where there is room to spend less. 

Optimize your accounts receivable process

As briefly noted earlier, many businesses struggle to get paid in a timely manner for their goods and services. Your businesses’ cash flow can feel the pressure when it takes a long time to receive payments. Spend time now—before the recession hits—improving and streamlining the accounts receivable process so it’s more timely and effective. Doing so can help businesses eliminate major financial stress down the road and they’ll save money by spending less resources tracking down late payments. 

The takeaway

There’s no denying that a recession can add a lot of worry to an entrepreneur’s plate. That being said, there’s nothing individuals can do to control the course the economy takes. What they can do to regain some control is to take the necessary steps to strengthen their businesses’ balance sheet. Doing so can put their business in the best position possible to weather any upcoming financial storms.