How to Recession-Proof Your Small Business

With the word recession trending in every other business publication, small business owners may feel a bit itchy. Shifts in your revenue cycle are just a part of doing business. These cycles make it easier to predict how your business will perform. Companies that survived the pandemic by the skin of their teeth will likely fall into two categories: burned out or geared up.

The economy is shifting. The threat of a recession has been looming since January 2022, and the effects of that uncertainty are being felt today. According to the National Bureau of Economic Research (NBER), “a recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.” Although we may not be able to predict when this cycle will end, there are steps small business owners can take to ensure their business can weather any storm.

Identify Your Business’s Vital Needs

• Maintain a healthy cash flow.
• Ensure you can pay your bills.
• Manage your expenses properly.
• Don’t stop marketing
• Keep your employees happy.
• Create a contingency plan for the future.

Maintain Financial Discipline

The most important thing you can do to survive a recession is to maintain financial discipline. This means:

1. Creating a budget and sticking to it.
2. Pay your bills on time
3. Make sure you spend your money wisely.
4. Keep a healthy cash reserve

Once you have a clear business operating budget and systems in place for income and expense management, you should consider bolstering your cash reserve. This is one of your business’ savings accounts. The goal with the cash reserve is to have anywhere from three to six months of your business’ operating expenses in this account. This is one way to curb an economic downturn or slow sales cycle in the business. If you can cover your operating expenses during these times, you can redirect energy to new business development, product development, and the necessary steps needed to reduce costs until revenue gets back on track.

Have a Second Savings Account

The second savings account each savvy business should have is for taxes. You should set aside some money every month for taxes, even if it’s only $100. If you’re in business for yourself (whether as an LLC or Sole Proprietor), this payment will likely be relatively small compared to other expenses—but if you don’t pay it on time or miss paying it altogether, there are serious consequences that could put your business at risk:

• You could lose access to credit
• You could be hit with interest charges and penalties for late payments; and
• Other parties may not be willing or able to extend themselves in helping your company succeed (for example, suppliers may become wary about providing goods and services).

Assess and Adjust Cash Flow

Cash flow is the lifeblood of all businesses. It’s the amount of money coming in and out of your business. If you don’t have enough cash flow, you won’t be able to pay your bills, employees, or yourself in a timely fashion.

Start by collecting the data you need to analyze your cash flow. If your cash balance is decreasing, there are some tangible steps that you can take to stop the bleeding:

• Reducing Expenses (account payables)

  Take a look at your current operating expenses. Review one full month of your business bank statements. Highlight any recurring expenses that are predictable. These would include subscriptions or payment plans that you’re paying. For your favorite application, $15 to $30 a month may seem like a small fee, but those small amounts do add up over time. It will improve your cash flow if you can consolidate some of your existing software and technology applications or eliminate a few that just aren’t completely necessary.

  • Also, consider recurring flat costs that you have for independent contractors, virtual assistants, or other people who support the business. Cutting expenses that no longer serve the business are nonessential for sales and growth.
  • For services that the business needs to survive, ask about more flexible payment terms to help ease the burden on cash flow

• Extend Customer Value

  Improve customer service by nurturing relationships with existing customers. If they stay with you longer, they also provide more business revenue. That’s a win-win.

• Increase Sales

  Find new clients by filling in the gaps of your competitors. By conducting some market research, you may find a new service or product offering that your clients are craving that you can easily provide. Sometimes even a small pivot can do wonders for your bottom line if it means generating a revenue stream that wasn’t there before.

• Shift Billing Terms (account receivables)

  Consider how your clients are paying you. For consultants, this might be changing your billing terms.

  • Instead of requesting that a client pay you within 30 days of invoice, why not reduce that to 15 days?
  • You can also take more significant upfront deposits for larger contracts to cover some of your front-end expenses, so your business bank account isn’t so stressed during service delivery.
  • Consider pre-sales. What products or services can you offer now and have people prepay for? This is a great way to compensate for unstable economic forces while also offering a way to bolster our cash reserves

Create a Contingency Plan

If the economy does go into a state of flux, it is important to have contingency plans for various scenarios. Here are some steps you can take:

• Develop an emergency action plan. If something goes wrong, take immediate action to protect your business and its employees. Make sure that everyone knows their role and responsibilities during times of crisis. Are your job descriptions clear?
• Have a backup plan for all of your daily operations (e.g., financial systems, marketing plans). If one system fails or cannot be accessed due to a technical issue, you should have another system ready to go so that customers will not notice any interruptions in service quality or delivery timeframes. Do you have SOPs or an Operations Manual that folks can reference?
• Update your quarterly marketing strategy based on seasonal trends to capitalize on new opportunities as they arise.
• Create multiple income streams by diversifying into recession-proof sectors such as household staples or education.

Don’t Stop Marketing

While advertising is integral to marketing your company, it’s not the only way to get the word out. You must actively engage with your customers and prospects on social media and via email. This can be done by sharing content from other sources and posting updates about what’s happening in your business. Use these platforms to share news about promotions or new products—whatever will keep people interested in what you have to offer.

Even if it seems like too many people are selling similar things, being present on social media will help develop trust with potential clients and show them why they should work with you instead of another company offering similar services. It allows people to see how transparent and genuine you are so they know why they should choose one person over another when looking for their next service provider (or product).

Keep Your Employees Happy

If cash flow is the lifeblood of your business, employees (and contractors) are the heart. You count as one of them. You and your employees are the engines that keep the business running. In preparation for a recession, ensure that your team’s skills are honed and up to date. There may be someone ready to level up. There may be someone other employees listen to who might be prime for leadership. Keep an eye out for these opportunities. With voluntary walkouts on the rise, keeping your staff happy is paramount to your survival.

Keep up morale with transparency. Employees want to see what’s happening behind the scenes, just like your customers. Let your employees in on as many conversations as possible. Listen to them. Consider their feedback. Honor their contributions. They help keep the gears turning and should be well rewarded for doing so.

Strategies for weathering the storm

• Start with solid financial savvy and management practices.
• Make sure you have enough cash to get through the downturn and that it’s in an account that won’t be frozen by the bank.
• Have contingency plans if your first plan fails—and make sure that you and your team are clear on the processes and steps to execute that plan.

You need to be prepared for the worst when you’re a small business owner. Recession-proofing your business is vital to surviving downturns in the economy and ensuring that your company will thrive through any challenges that come its way.