8 Essential Things Small Business Owners Must Do to Prepare for a Recession
September 28, 2022 | Last Updated on: January 31, 2023
September 28, 2022 | Last Updated on: January 31, 2023
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An economic recession is a significant and prolonged slowdown in economic activity. To determine if an economy is experiencing a recession, the U.S. National Bureau of Economic Research (NBER) will monitor indications of economic decline including, real income, purchasing power, manufacturing outputs, employment levels, retail sales, and gross domestic product (GDP).
While preparing for a recession can be terrifying for business owners, it’s important to realize that a recession is simply one of the four phases of the economic cycle:
While there’s no scientific way to tell how long a recession will last, NBER says that the average recession, measured after World War II is 11 months. When the world was exposed to the pandemic in 2020, it triggered a short-term recession that only lasted two months, but the Great Recession that began in December 2007 lasted 18 months. While the length of a recession cannot be predicted, history shows that recovery always follows.
If you’ve been watching the news or keeping up with sites like Forbes.com or LinkedIn, you’ve probably heard a lot of the terms “inflation and recession.” Many individuals and business owners are beginning to ask, “Are we in a recession or is one coming?” The answer is a bit complicated. While the present economic activity does not qualify as a recession, there are some indications that we may be heading in that direction.
As we continue to navigate the economic downturn, small business owners everywhere are noticing the impact of inflation and a possible recession. During periods of a recession, a business may be affected in the following ways:
The costs to deliver inventory for manufacturers and suppliers increase because of rising unemployment rates and reduced access to affordable raw materials. Those inflated costs are pushed onto the purchasing business. Large companies can typically navigate supply chain issues more effectively than small business owners because of their access to resources.
During a recession, the cost of goods increases because of the increased expenses of the supplier. Existing customers begin to spend less money because they are coping with layoffs, increased living expenses, and fear. The combination of increased costs and reduced revenues can have a negative impact on a small business’s credit score.
During a recession, small business owners may miss a loan payment or utilize all available credit. Financial decisions made during a recession may have lasting consequences if they weaken the business’s credit history.
Business plans are designed to project consistent growth. A recession affects the rate of growth for a small business. In the wake of a recession, the business plan regarding staffing, expansions, and capital concerns needs to be revisited and revised.
While we can’t say for certain whether we are heading for a recession or not, we can say that implementing some of the following tips can benefit your business. With some minor adjustments to your business model, you may find your business prepared to do even better during a recession.
Certified financial planner, Christopher Lyman, suggests that “entrepreneurs and small businesses should set aside one year of expenses” during times of economic uncertainty. One of the most direct ways to build cash reserves, or an emergency fund, is to reduce expenses. Cutting costs will free up more cash flow, which will allow the business to move some cash to a savings account each month.
It is good practice for a business owner to frequently review the income statement and budget to identify areas where the expenses can be decreased, but it is even more important in the wake of a recession. Some tips for cutting costs include:
Strategizing to increase revenues before tough times is the best defense against unpredictable revenues. Whether your small business provides goods or services, there are some ways you can ramp up revenue before the impact of a recession overwhelms your customer base.
Over time, unpaid invoices can start to add up, which causes a rising accounts receivable balance. At a time when economic concern is putting pressure on small business owners everywhere, collecting unpaid accounts receivables is a smart way to increase cash. To work down the amount of money owed to your business by customers, begin by printing a detailed ledger or making an accurate list of unpaid invoices and then contacting those customers. For clients that can’t pay the invoice in full, consider offering a payment plan and setting up recurring payments for the agreed monthly payment. Another option is to offer a discount for customers that are willing to settle their debt quickly.
Revisiting your current business strategy is a proactive way to prepare for the next recession. Many entrepreneurs mistakenly cut marketing and advertising costs when they are trying to decrease expenses, but that can negatively impact future sales. An effective marketing plan will drive customers to your business before, during, and after a recession. In tough times, consumers try to cut back on their own spending, so they become more selective with the goods and services they purchase and where they get them from. So, now may be the time to ramp up marketing efforts. Here are some ways to upgrade marketing:
After some time in business, it is not uncommon to experience a shift in priorities. However, when preparing for a recession it’s important to revisit the value your service or product is bringing to the customer. Have you changed suppliers without product testing or found yourself being able to complete projects must faster than in your business’s early days? If so, it may be time to get back to the basics. It can be challenging to find the balance between quality and quantity, but now’s the time to focus on the value your business provides to customers.
A proactive measure to take in case a recession hits is to work on customer loyalty. If you’re an established business owner or even if you’ve just launched your first startup, now is a great time to nurture customer relationships. Loyal customers are more likely to continue to support your business if they feel connected. Tough times make good times to reach out to customers that have purchased any service or product in the last six months and thank them. This can be achieved by sending coupons or thank you notes, either by mail or email. Hosting a customer appreciation day may also be a great way to reconnect with your loyal customers and connect with new customers.
Business credit cards and lines of credit are excellent resources during a recession. To prepare for an economic downturn, review the credit limits on sources of revolving credit, like credit cards and credit lines. While it is not ideal to max out credit cards or draw all available funds on a credit line, in a crisis the credit can save your business. Work with lenders, credit unions, and banks to review increase options so your business has fast access to more working capital if needed. If your small business doesn’t have a line of credit, now is a great time to apply. Remember, monthly payments will only be calculated on the amount of funds you’ve used not the maximum credit line.
There is no surefire way to recession-proof your business but making sure your business has enough capital can be done before the slowdown. Working with a bank or lender to consider small business financing options is beneficial to do as a proactive measure because your business’s creditworthiness may be evaluated based on the last two years of income tax returns. It will be easier to secure a loan when your annual revenue is stable or increasing than to wait until the business is experiencing financial hardship. Some financing options to consider include:
As there is more and more talk of a recession, it is natural for people to be concerned about their personal finances and business incomes. A recession could last as long as 18 months and affect interest rates, employment, and the cost of living. Small business owners can take steps to prepare for the recession by cutting costs, revising marketing efforts, collecting receivables, and connecting with customers.
Considering financing options is also a great solution for small business owners. If securing capital is on your to-do list, reach out to Biz2Credit today to get started, like Brian Lillie of The Party Staff, Inc, who found Biz2Credit while experiencing financial strain due to the pandemic.
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