A recession, strictly defined, is two consecutive quarters of negative economic growth. And as anyone who experienced both the 2018 and 2020 recessions knows, recessions can take many forms.
The 2008 recession was marked by falling housing pricing, a plummeting stock market, an increase in home mortgage foreclosures, and millions of people losing their jobs.
The 2020 recession, precipitated by the COVID-19 pandemic, looks quite different. While unemployment rose sharply when businesses were forced to close to curb the spread of the virus, the stock market remained at near-record levels and the housing market is strong.
But no matter what a given economic downturn looks like, every recession can wreak havoc on a small business, its owners, and its employees. These seven strategies will help you plan for and protect your small business from a recession.
How to Recession-Proof Your Small Business
1. Build Cash Reserves
One of the first things that happens during a recession is companies start taking more time to pay invoices. This can make it difficult to pay your own bills while waiting for payments from clients or customers. For this reason, your first priority needs to be on building cash reserves. It’s simple, but not always easy.
The downside to stockpiling cash is that the money isn’t working for you. If you have cash sitting in a bank account, you aren’t earning a great rate of return. Despite this trade-off, your cash reserves need to be in a savings or money market account so it’s readily accessible when you need it to cover salaries, pay vendors, and keep the lights on. Ideally, you’ll have enough to cover three to six months of expenses.
2. Manage Receivables
Slow-paying clients are always a problem, but clients who don’t pay at all because they went out of business are an even bigger issue. Fortunately, you can minimize – and perhaps even prevent – this problem by keeping a tighter rein on receivables.
- Have Contracts in Place With All Clients. Your contract should specify how much your product or service costs, how soon clients should pay, and what happens when payments are late. For example, your contract can state that you will assess a 2% penalty on outstanding balances for each month the payment is late.
- Check Credit Before Offering Terms. If you allow your clients to pay you after delivering your product or service, consider checking their business credit. You can check a company’s credit report using Dun & Bradstreet, Nav, Equifax, or Experian. These services require a fee, but that fee is small compared to the potential losses if a company leaves you hanging with hundreds of dollars of outstanding invoices.
- Consider Collecting Deposits Upfront. Asking for a deposit is standard practice in some industries and rare in others. If you’ve been working with an established, reputable company for a long time and never had an issue collecting payments, you probably feel comfortable without a deposit. However, if you’ve never worked with the client, requiring a deposit upfront can minimize the chance of nonpayment.
- Track and Collect Overdue Invoices. If you don’t already have a system in place for tracking and collecting receivables, get one as soon as possible. Most small-business accounting software like Quickbooks or Freshbooks provides invoicing and receivables monitoring and allows you to send reminders to late-paying clients or customers. As soon as you notice an invoice is past due, send an email or pick up the phone to discuss payment with your client. Making an extra effort to get paid on time will improve your cash flow during lean times.
3. Watch Your Costs
During good times, many small-business owners embrace the philosophy that you have to spend money to make money. Making money in your business often requires investing in supplies, products, advertising, and other business expenses. However, those expenses can add up quickly and make it challenging to build cash reserves. Making matters worse, if you spend every dollar you bring in, by the time a recession hits, it’s difficult to make changes fast enough to keep your business afloat.
A good rule of thumb, whether the economy is on a downturn or not, is not to spend money on a product or service unless you truly need it. Make smart investments in areas that can grow your customer base and increase profits, but do it in moderation.
4. Diversify Your Client Base
Take a look at your revenues over the past year. Does a large percentage of your income come from one or two clients? During a recession, that can be a recipe for disaster. If just one of those current customers leaves, goes out of business, or starts paying slowly, your business will be in trouble.
Diversify your client base now by making a change in how you find new customers. If most of your marketing efforts involve social media, try attending some face-to-face networking events. Ask current clients for referrals or add client testimonials to your website.
Hire a marketing team to look into strategies you might not have considered previously. The marketing budget is often some of the first areas small-business owners cut when times get tough, but that’s one of the last places a struggling business should be reducing costs.
The marketing and media outlet AdAge reports that companies that cut spending during previous economic downturns lost market share and typically never regained it, while companies that maintained or hiked ad spending lost much less and tended to recover faster. During tough times, the companies that continue reaching out to customers will reap the greatest rewards when the economy turns around.
5. Pay Off Debts to Improve Cash Flow
Debt can be especially problematic during a recession if a large percentage of your revenues have to go toward debt payments rather than operational costs. Building three to six months of cash reserves should be your first priority, but once that’s in place, do what you can to become debt-free.
Even if you can’t afford to pay off your debts, review the ones you have outstanding now. If any will require a large lump-sum payment in the coming months, you can refinance them into a longer-term or lower-interest-rate loan now. Once a recession hits, it can be difficult to find lenders willing to refinance, and those balloon payments can be disastrous if you don’t have the cash on hand when they come due.
6. Look for Opportunities
During a recession, many business owners focus on tightening the belt to improve the bottom line. While it’s a good idea to economize during a downturn, cost reduction is only a small part of the story. A recession can be a time of opportunity for smart business owners.
- Watch the Competition. If your competitors cut their advertising budgets, increase yours and grab the opportunity to capture a larger market share.
- Improve Operational Efficiency. A recession is an excellent time to automte tasks, eliminate waste and streamline processes.
- Evaluate Vendors and Contracts. A recession affects almost all businesses, so look for cost-effective opportunities to take advantage of lower prices on technology and equipment that can help streamline processes and production.
- Explore New Markets. When competitors fold, it’s another opportunity to gain market share. Consider acquiring struggling businesses or creating alliances to gain access to new markets.
Economic downturns are difficult, but much of the above advice applies whether the economy is in a slump or experiencing a boom. If you act early, before there is definitive proof of a recession, you can lay the groundwork to survive and thrive.
How has the recession impacted your small business? What steps are you taking to protect your business now?