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From profits to employee satisfaction, following these five key performance indicators will help you determine whether your business is prepared to handle a recession. — Getty Images/SouthWorks

Is your business strong enough to weather the next recession? While an economic downturn might be the last thing you want to think about, it’s important to take a critical look at various aspects of your business to make sure it can get through tough times. After speaking with three small business experts, we’ve compiled a list of five key performance indicators to keep a close eye on.

Profits

No matter what type of business you run, the goal is always to make a profit, which is your revenue minus expenses.

“Profit is the ultimate metric to track, since a company can have exponential sales/revenue growth and not have any profit due to high costs or nonprofitable projects and services,” said Alice Bredin, President of Bredin, Inc., a market research agency that tracks the small and midsize business owner. “When a company takes its eye off of profitability, entrepreneurs can find themselves in a situation with decent sales numbers but a cash flow problem or lack of profitability.”

If you think your profit margin is in trouble, actions to take can include increasing sales/marketing efforts with high-profit accounts and customers, raising prices, and cutting expenses, said Bredin.

Sales

Businesses should be aware of the sales numbers needed to maintain their profitability. “Keep an eye on both your top-line sales figures and your gross margin to get a complete picture,” said Shawn Plummer, CEO of The Annuity Expert, an online insurance agency.

If you need to improve sales, focus on marketing to customers who still have the potential to buy during a recession. “Determine which customers provide the greatest profit and shore up those relationships through good service, upselling more to them if possible, and promoting your most popular products,” said Bredin.

Keep an eye on employee turnover and engagement levels. Your employees are your most valuable asset, so it’s important to keep them motivated during a recession.

Shawn Plummer, CEO, The Annuity Expert

Cash flow

“A healthy cash flow is essential for any business, but it becomes even more important during tough economic times,” said Plummer. “Make sure you have a good handle on your cash inflows and outflows and look for ways to improve your cash management if necessary.”

Unfortunately, it could take just one slow-paying customer to put the squeeze on your cash flow. “You need to get bills out quickly, follow up immediately if there are any problems with payments, and find ways to cut down on mistakes with invoicing that might slow down customer payments,” Bredin said.

Consider opening a line of credit to help keep you afloat in hard times. “It’s a good safety net,” said Katie Lyon, Co-Founder of Allegiance Flag Supply, a company that sells made-in-USA American flags. “When large orders come in and you’re strapped for cash, and you need to build inventory to complete those orders, credit lines can be so helpful.”

Employee satisfaction

In an economic downturn, it can be easy for employee morale to drop, but you should make sure you’re doing everything you can to support your workers. “Keep an eye on employee turnover and engagement levels,” said Plummer. “Your employees are your most valuable asset, so it’s important to keep them motivated during a recession.”

There are ways to make your employees happy without spending a lot of money. “Even if you can’t give raises right now, you can offer perks like flexibility with hours and the option to work remotely,” said Bredin. A 2022 Paychex survey of human resources professionals revealed that increasing work flexibility via flexible hours and remote work outranked higher pay as the top tactic in keeping employees retained.

Creating an enjoyable work environment where you show your appreciation can also go a long way. “We recently had an ice cream party to boost morale a bit,” said Lyon. “At a small cost to the business, things like that can make an employee’s day.”

Customer retention

Your existing customer base can be especially valuable during difficult times. “You’ve already spent money to acquire these customers and they’re your biggest supporters, so look for ways to keep them interested,” said Lyon.

A survey by KPMG found that when a customer is loyal to a brand, 86% will recommend a company to friends and family and 66% are likely to write a positive online review after a good experience.

If you need help calculating your customer retention rate, or the percentage of existing customers who remain customers after a given period, Salesforce provides a simple formula you can use.

To improve customer retention, consider issuing surveys or speaking to customers directly to gather feedback on what products they need right now and how your business can better serve them. “What’s really important is to maintain relationships, because the cost of rebuilding or restarting a relationship is so high,” Bredin said.

[Read: Start. Run. Grow. Weathering Financial Uncertainty]

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Published June 24, 2022