How to prepare your small business for a recession.
Stephen King serves as President & CEO of GrowthForce, the leading outsourced accounting and bookkeeping service provider for businesses.
The U.S. annual inflation rate reached a 40-year high in June 2022 at 9.1%. In the first quarter of 2022, the U.S. gross domestic product shrank by an annual rate of 1.6%; in the second quarter, it shrank by an annual rate of .9%. Plus, at the end of July, the Federal Reserve announced that it would be enacting a second consecutive .75 percentage point interest rate hike.
With many businesses still recovering from the effects of the pandemic and memories of the Great Recession of 2008 still fresh in most of our minds, many business owners are not prepared to face another economic recession.
What is a recession?
A recession is a prolonged period of an economic downturn that is both widespread and significant. A period of economic downturn often lasts at least six months or longer. For this reason, an economic recession is often recognized after a country’s gross domestic product declines for two consecutive quarters. According to this definition, the U.S. would currently be experiencing an economic recession.
However, as NPR reported, this is “not an official definition.” Many factors determine whether a country is in a recession, and due to job growth and foreign business investment, “The White House has pushed back against calling the current economy a recession,” NPR also said.
Seven Survival Tips For A Recession
1. Manage your cash flow.
In easy or difficult economic times, cash is always king. Cash flow, the timing of when money flows into and out of your business, can make or break your company. When times are tough, however, cash flow challenges can be particularly difficult to overcome. With expenses higher than usual and revenue lower than usual, cash will be tight, and balancing your budget could start to feel a bit like a tightrope walk.
To get a handle on your company’s cash flow, look at your current cash flow statement daily, and start forecasting (if you aren’t already) with trailing three-, six- and 12-month cash flow forecast charts. These charts can help you anticipate times when cash is going to be tight, so you can implement strategies to prevent these challenges from occurring.
Additionally, create best- and worst-case scenario budgets that help you better prepare for unforeseen challenges or unexpected triumphs.
2. Get a handle on your costs.
With inflation at a 40-year high, costs are up, and an economic recession is only going to make increasing costs more difficult. Do everything you can now to evaluate your operations and trim the fat so you can strengthen your cash position and enter the next recession with operating procedures that are already lean and mean, so to speak.
3. Protect your revenue.
Use unit economics to identify your strongest revenue channels, and then protect these revenue channels and the profits they generate. This might involve adjusting your business model, optimizing pricing structures and making choices to cut products, services or clients that do not generate strong profit margins for your business.
4. Be smart about debt management and new financing.
In difficult times, paying off debts can seem tempting. However, doing so can quickly deplete your cash reserves, which can leave you in a tough spot if you experience cash flow problems down the line. When going into a recession, assess the interest rates you’re paying on your debt, and consider focusing on paying down the highest.
If your cash reserves are already low, you might also consider looking into potential financing options, especially if you have seasonal cash flow issues in your business. Having a line of credit already established with your lender might save you stress in difficult times.
Before taking on new debt, however, be sure you carefully assess the additional costs and potential payment amounts to ensure the debt won’t simply put a bandaid on a more serious, systemic financial wound in your company.
5. Strengthen your cash reserves.
In addition to considering how you manage and take on debt, focus on your company’s cash reserves. Savings is what can carry you through difficult economic times. You can take steps to strengthen your company’s cash reserves. For example, instead of reinvesting profits in the business or paying them out in dividends to shareholders, you might choose to squirrel the excess away so you can rely on it on a rainier day.
6. Stay on top of your receivables.
During a recession, everyone struggles financially. This means your customers might start paying more slowly, and you might have a more difficult time collecting accounts receivable. Make an effort now to evaluate your clients and their paying habits. If you need to make changes to payment terms to get you through tough financial times, be sure to schedule contract renegotiations whenever possible to close up your pay cycles and shorten your sales outstanding figures.
Stay on top of collections. Offer additional ways for your clients to pay (such as electronic payments). You can also consider stopping work with clients who don’t pay on time and no longer extending credit to clients if your cash flow can’t withstand it.
7. Make data-driven decisions.
When times are tough, it’s crucial that you make strategically sound decisions. When cash is tight, the slightest misstep could mean the difference between success and failure. Even if your instincts as a business owner are good, you need to consult your numbers, look at your company’s financial trends and evaluate forecasts before you make any changes in your business.
Surviving a recession: Embrace the challenge and do not fear change.
There is nothing you can do to control the direction of the U.S. economy. So, it’s important to focus your attention on what you can control: your business. Yes, a recession will bring countless challenges and hurdles for you and your business to overcome, but embracing the challenges, knowing your numbers and leaning into smart changes to lead your company with a fearless growth mindset can help you overcome and emerge a strong business leader with an ironclad business strategy.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.