Question

If you were a CEO, how would you recession-proof your company?

Answer 1

Recession is a phase where there is financial crisis.

Being a CEO I have to make strong liquidity and solvency of the company for making it recession-proof.

Liquidity: this is the feature of paying current liabilities of the company without taking any further loan. This ability could be judged through current ratio, quick ratio, and operating cash flow ratio – suppose the current ratio is 2, indicating good liquidity. CEO has to improve liquidity by ensuring adequate cash in hand always and not keeping payments in due (like salary payable, interest payable, etc). If these things are maintained, the company must have strong liquidity.

Solvency: It indicates financial existence of the company in the long-run. The equation of the balance sheet is (Assets = Liabilities + Equity). If equity is high and liability is low, the company must have greater solvency and should not face recession in the long-run. A liability has repayment burden, which reduces solvency; but this is not there in equity financing. CEO must ensure not to take unnecessary loans or debts – if money required, it could be arranged through issuing shares or through the use of equity.