A recession or at least an economic slowdown is on the way, so small businesses need to prep to weather the storm. With fewer financial resources than larger companies, small businesses can be hit especially hard by a downturn, so it’s vital to focus on preparing the business well in advance of when finances become a problem.
Here are seven ways experts say small businesses can prepare their finances for a recession.
7 ways small businesses can prepare for a recession
Start saving cash
If you’re seeing a slowdown in sales as part of a broader economic slowdown, it can make sense to start stockpiling cash. That process could take a variety of forms depending on the type of business:
- As cash comes in, a good place to deposit money is in a high-yield savings account. This allows your money to earn a higher return and keeps it easily accessible in case of emergencies or unexpected expenses.
- When dealing with a slow-moving item, consider replacing fewer units as inventory is depleted. The cash that’s not reinvested can then form part of your buffer.
- Re-consider the necessity of capital expenditures, even if you’ve already started investing in a project. Could it wait 12-18 months without hurting the business?
- Close out some slower-moving or nearly obsolete products by using discounts while times are still relatively good. This helps free up valuable storage space and helps improve cash flow.
- Consider suspending matching contributions to retirement plans such as 401(k)s, SIMPLE IRAs or SEP IRAs. You might even promise to make it up to employees later when times are better. If you decide to go this route, be sure to communicate it clearly with your employees.
Cash from your own operation is going to be the cheapest source of funding when times get tough, so it makes sense to have plenty of it on hand to help you through the lean times.
Pay down debt
While you’re thinking about hoarding cash, it’s also a good time to assess your debt situation and determine if it makes financial sense to pay that down while you can.
If you have a lot of high-cost debt that is crimping your cash flow, it may well be better to pay that down today than go into a recession with it over your head. But you’ll have to balance that against your future need for cash, too. If you pay down debt now and need to borrow later, you may be forced to accept even less favorable terms then, as credit becomes more expensive.
Still, you’ll be better off getting rid of high-interest debt to the extent that you can keep it off your books until the economy improves and business picks up again.
Determine how resilient your business may be
Assess the resilience of your own business to see how it could fare during a recession.
“As people’s incomes decrease, they tend to cut back on non-essential purchases, which can hurt small businesses that rely on consumer spending,” says Jeff Wood, CPA, investment advisor at Lift Financial in South Jordan, Utah. “Small business owners should honestly evaluate their product or service offering to determine how resilient it would be during a downturn in the economy.”
If you offer essential products – think a grocery store, tax preparation or even a funeral service – you may not notice a blip when the economy falters. You might even fare better, for example, if consumers shift from more expensive alternatives such as restaurants to home-cooked meals.
However, If you offer a non-essential or luxury product, your cash flow may dry up during a downturn or at least be severely crunched, as consumers themselves struggle to keep up.
Spot the potential weak points of your business and then start addressing them today.
Get ready to pivot for cash flow
If you see sales are likely to fall during a recession, get ready to adjust and harvest cash flow.
“Small businesses should be able to stay agile during a recession,” says Derek Miser, investment advisor and CEO at Miser Wealth Partners in Knoxville, Tennessee. “This means they should be prepared to pivot and adjust their business model and strategies in order to respond to changing market conditions.”
The type of adjustment depends on the type of business. But it can be worthwhile to understand that it may become necessary to earn lower margins in order to generate the cash to survive.
“Small businesses can offer loyalty programs or special promotions to incentivize repeat business,” says Wood. “They may figure out how to improve customer service or implement a good drip marketing newsletter campaign to provide value and to stay connected with existing clients.”
Options also include offering a discounted version of your core product or service to keep customers coming in or payment plans for those who can’t pay the cost in full.
Line up new sources of financing
Money is the cheapest when you don’t need it. When times are flush everyone seems to be offering low-cost credit. But once times start to get rough, lenders of all stripes get a lot more picky about who they’ll lend to and at what price.
Start lining up new or potential sources of credit while times are good:
- Can you work with a lender to establish a line of credit or other credit today that may be cheaper than what you’d be forced to use later?
- Does it make sense to work with a factoring lender? Factoring gets you cash based on your future cash flow from amounts owed to the business such as accounts receivable. While the cost may be high, it could offer a cash lifeline just when you need it.
- Check out small-scale alternatives such as credit cards. If you’re running a small shop, it may even be feasible to run up a balance, transfer a balance or otherwise take out cash from a top balance-transfer credit card.
- You may be able to access 0 percent interest for an introductory period ranging from 6-24 months with relatively minimal transfer fees.
However you finance your business, getting your financing in place before you need it could save you a lot of money later on or even keep you from going under.
When considering cash flow, it’s key to think about your expenses and how you can pare them back today in preparation for a recession or for later on, if things become more dire.
“Small businesses should review their expenses and cut any that are not essential to their operations,” says Wood.
Naturally, you’ll want to consider how any cuts will affect the service or products you provide and whether they make sense for your business. Cutting a feature that’s popular with customers may hurt your business more than it saves you in expenses, so you’ll need to strike a balance. But if you can provide the same service at lower cost, then you may end up much better off.
While the obvious place to cut expenses is labor or pricier overtime costs, it may be easier to cut in places that don’t affect the product or service, at least as far as customers can see.
“This could be renegotiating contracts with vendors, moving to a smaller office space or even cutting costly entertainment expenses out of the budget if they don’t make sense for the bottom line,” says Wood.
Prepare to thrive on the other side
While a recession may create difficulties even for well-positioned businesses, it need not all be negative, especially if you’re running one of the more strategically advantaged companies.
“A recession may create an opportunity for small businesses to increase their market share if they are able to stay in business and provide a good product, service and experience to their customers,” says Wood. So a well-run business may emerge stronger on the other side.
If your company is well-positioned for a recession and you have cash and plenty of financing in place, it may make sense to think about how you can position the business to thrive, especially coming out of the recession. For example, when you can see the economy beginning to turn a corner, it may make sense to restart a capital investment that you previously put on hold.
While a recession may hurt every company, it can hurt some more than others, and you want to be the one that improves relative to the competition. To paraphrase an old saying, “You don’t have to run faster than the approaching bear, just faster than your rival.”
Small businesses have a lot of ways to prepare for a recession, but the key element among them all is cash – having plenty of it and keeping it flowing as much as possible. It’s never too early to start bolstering your small business against the potential arrows of outrageous fortune.