According to the textbook definition, a recession occurs when the economy contracts for two consecutive quarters. The recessions of 2018 and 2020 showed that there are several kinds of recessions.
The recession in 2008 was characterized by a decrease in property prices, a decline in the stock market, a rise in mortgage defaults, and the loss of employment for millions of individuals. After the COVID-19 pandemic of 2020, the economic downturn will look very different.
Despite a substantial increase in unemployment as a result of enterprises being closed to prevent the spread of the virus, the stock market remains booming and the property market is holding its own.
However, small businesses, their owners, and their staff are vulnerable to the effects of any recession. If you follow these seven steps, your small business will be better prepared to weather a downturn.
How to Make Your Small Business Recession-Proof
1. Make cash reserves.
When the economy is in a slump, late invoice payments are one of the first signs of trouble. Due to this, it may be difficult to meet personal financial obligations while waiting for payment from clients or consumers. Having a good financial reserve should be a top focus. Simple, but not necessarily easy.
The problem with hoarding cash is that it isn’t generating interest or other returns while you sit on it. Deposits in a savings account don’t provide a high rate of return.
Despite this tradeoff, it’s essential to have a savings or money market account for emergency cash flow purposes including paying employees, suppliers, and utility bills. You should be able to pay at least three to six months of living costs.
2. Control your receivables
Clients that pay slowly are annoying, but those who never pay because they went out of business are a major headache. Fortunately, this issue can be limited, and even avoided entirely, by exercising greater control over receivables.
- Get all of your clients to sign contracts. Price, payment terms, and consequences for late payments should all be spelled out in detail in the contract you enter into with your customers. It’s possible to add a 2% late fee to the total amount owed for every month that payment is overdue, as stated in the contract.
- Be sure to verify credit before extending payment terms. It’s a good idea to examine a client’s business credit if you offer post-delivery payment options. Dun & Bradstreet, Nav, Equifax, and Experian are all places you can look up a business’s credit score. Of course, there is a cost associated with these types of services, but it pales in comparison to what could be lost if a supplier simply disappears, leaving you holding the bag for hundreds of dollars in unpaid bills.
- You might want to take down a down payment right away. Deposits are common practice in some fields but not in others. If you have been doing business with a reliable, well-known firm for some time and have never had any trouble getting paid, you may not feel the need to request a deposit. However, if this is your first time working with the client, it is wise to collect a deposit.
- Find overdue invoices and be paid for them. Get a receivables tracking and collection system up and running as quickly as possible if you don’t already have one. Invoicing and tracking receivables, as well as contacting overdue clients or customers, are all features of the accounting software used by small businesses.
When an invoice is overdue, it’s important to contact the client immediately by email or phone to discuss making arrangements for payment. Improve your cash flow by making an extra effort to get paid on time, especially if you’re experiencing financial hardship.
3. Watch Your Budget
Some small business owners believe that during prosperous times it is necessary to invest some of their earnings back into the company. In order to turn a profit, many businesses must first front the money for things like inventory, marketing, and distribution.
These costs, however, have a nasty habit of piling up, making it difficult to save money. When a recession hits, it’s already tough enough to keep a firm solvent without spending every last cent you make.
A solid rule of thumb to follow regardless of whether the economy is in a slump or not is to only spend money on things you truly need. Spend wisely in order to expand your clientele and boost your returns, but don’t go overboard.
4. Expand Your Clientele
Check out the money you made last year. Do you have a few particularly lucrative clients who account for a disproportionate share of your revenue? In the midst of a downturn, that might prove disastrous.
If even one of your present clients decides to stop using your services, goes out of business, or begins paying late, it might spell disaster for your company.
Now is the time to try a new approach to expanding your business’s clientele. If you’re doing most of your marketing on social media, you should attempt branching out into in-person networking opportunities. The best way to get new business is to have your current customers spread the word for you.
Consider employing a marketing group to explore avenues you hadn’t thought of before. For many small businesses, the marketing budget is the first to go when times become rough, despite being one of the last items to cut when finances get tight.
Marketing and media publication AdAge found that businesses that reduced expenditure during recessions lost market share and seldom earned it back, while those that kept or increased their spending on advertising suffered significantly less and recovered more quickly.
The firms that maintain consumer contact during difficult economic times will be the most successful when the economy recovers.
5. Reduce Debt to Boost Cash Flow
If a big portion of your revenues is going into debt payments rather than operational expenditures, then debt is especially problematic during a recession. First and foremost, you need to save up enough money to last you for at least three to six months. Only after that should you focus on paying off your debt.
Debts should be reviewed even if repayment is out of the question. You can refinance any loans that require a sizable down payment within the next few months into a loan with a more manageable monthly payment and interest rate immediately.
If you don’t have the money on hand to pay the balloon payment when it’s due and you’re in a bad financial situation because of the recession, you’re in a lot of trouble.
6. Consider Possibilities
Many business owners, when times are tough, cut costs to boost profits. Although cutting costs is a wise strategy in a recession, it is by no means the only factor to consider. Intelligent business entrepreneurs can seize opportunities during economic downturns.
- Keep an eye on the Opponents. If you see that your competitors are decreasing their advertising spending, this is your chance to boost your own spending and gain market share.
- Boost the efficacy of operations. Automation, waste reduction, and procedure simplification are all highly recommended during economic downturns.
- Examine your Contracts and Vendors. When the economy is down, practically every company is looking for ways to save money. One way to do this is to take advantage of sales of machinery and software that can increase efficiency.
- Learn about Untapped Markets. Gaining market share is easier when rivals fail. To expand into new consumer niches, it may be worthwhile to acquire struggling businesses or form strategic partnerships.
Many of the aforementioned pieces of advice are useful whether the economy is booming or tumbling. You can better prepare for survival and even growth if you take action before there is clear evidence of a recession.