You are in charge of many things as a small business owner. You can hire and fire employees, set your marketing budget, select suppliers, and make many other important decisions. You cannot control many things, but it can significantly impact your business.
Business owners are often faced with a great deal of uncertainty during recessions. You will not know the length of the recession, the depth, or the types of business that will be most affected. Any business will be concerned about revenue when the economy begins to contract. When people fear losing their job or losing their job, they will slow down on spending. A recession can bring other surprises, such as slow-paying clients or supplier problems.
You can prepare for the unexpected even though you cannot control the economy. Here are six ways to prepare your business for a recession.
Challenge: Sales begin to drop.
A downturn’s first and most visible effect is that consumers will cut back on their expenditures. As people cut back on what they consider luxuries, different industries will be affected at other times. Diversifying your customer base is essential for any business, regardless of the industry. In stable economies, relying on more than one or two big customers can be risky. But in times of economic downturns, it becomes even more difficult.
Solution: Increase your cash reserves. You should always have an emergency fund in your bank account. Your business should do the same. It would help if you aimed to have at least three months’ worth of payroll and expenses in your bank account.
Problem: Customers who pay their invoices slowly are usually significant.
In a recession, you may find that payments slow down if you have corporate clients or if you are a service provider that bills customers rather than collects the amount at the time of sale. You should have a system in place that not only allows you to invoice promptly but also reminds your clients regularly. In a recession, you should also review your policy on late fees. If you do not charge clients late fees, when is the right time? Should you forgive late payments from loyal customers?
Solution Apply before you need financing. Securing the funding before your cash flow becomes a problem is best. In a recession, a line of credit, or other flexible financing options, such as an advance on future payments, could be the lifeline for your business.
Challenge: Revenue forecasts are still being determined.
From a business standpoint, uncertainty is the most challenging thing to deal with in a recession. It’s impossible to know when the economy will rebound and, therefore, when your revenue will increase. Try some innovative tactics to boost your foot traffic and combat seasonal slumps. These may be more prominent in a recession.
Solution Reduce discretionary spending. Be careful when investing significantly to expand your business or acquire new equipment. Find ways to reduce your overhead costs, such as rent, utilities, and insurance, as well as advertising and public relations agencies and other expenses that are not directly related to the creation and sale of your product.
Challenge: Suppliers need help.
Your vendors and suppliers will also be affected by a recession. Some vendors will react the same way as you: by cutting costs where possible, insisting on prompt payment of invoices, and finding creative ways to increase customer loyalty. Only some businesses can survive a severe recession. Imagine what would happen to your business if you suddenly lost one of the regular suppliers, or your landlord sold your building. Planning for these scenarios now is better than waiting until the recession hits.
Solution: Strengthen relationships and build new ones. You can weather any storm with solid relationships. You can ask for a discount if you have been a loyal customer. A recession can also be a great time to find alternative vendors and create contingency plans.
Challenge: Corporate investment failure
A slumping market can worsen your cash crunch if your business invests. You can build your business assets by investing, but your strategy must align with your risk tolerance. Depending on your age, investment goals, and comfort level with risk, you may accept a different risk for your business than what you would tolerate in your investments. Set a plan you will stick to when the going gets tough.
- Diversify your portfolio.
- Avoid making drastic changes when the stock market is in a downward spiral.
- Look for ways to divert your corporate investments from your industry. You may be tempted to invest in a field you are familiar with, but if your business is your primary source of income, you will already be exposed to any industry downturn.
Your best defense is a diversified portfolio, which will help you to avoid a recession in your industry.
Staff morale starts to slip.
You can’t hide the tough times in a small company from your staff. Your employees will know if sales are down or foot traffic has dropped. Layoffs are likely to be on their minds long before you do.
Solution Be transparent and only consider layoffs as a last resort. It is essential to manage staff morale to get through a downturn. Showing your employees your financial records is unnecessary, but you should be honest about your challenges. Suppose you can reduce your staffing costs while not cutting jobs. Of course, you can always lay off employees, but they will appreciate it if you work to keep their jobs.
The conclusion of the article is:
Every business will eventually face a downturn in the economy. It is something that every business owner should keep in mind. It’s important not to let the fear of bad times stop you from taking risks to grow your company. Instead, it would help if you thought about recession-proof it so that you are not scrambling to keep up when consumer spending declines. Although you may not have control over the state of your economy, you can prepare yourself for a challenging quarter or year. In the end, recession-proofing will give you the confidence to deal with any economy.