How To Survive a Recession: For Small Business Owners
Just over two years out from the last economic downturn, and we're facing another potential recession. We gathered some of the best tips to help you and your business get financially fit for a down-economy.
We’ll answer all of your questions like;
Should you cut costs, or get more ambitious with spending? Should you borrow and make sure you have a financial cushion, or get rid of all your debt and stay as lean as possible? Should you even be making any drastic changes to your business in the first place?
Here’s a list of five things you can take action on for your small business to get recession-fit—and stay there.
1. Keep a closer eye on your finances
Knowing your numbers is a good ideas regardless of whether you’re in a recession or not. But in a recession, the margin for error becomes a lot narrower.
When you have up-to-date bookkeeping and monthly financial statements, you can always see exactly where you stand financially. That way, you know where you’re over-spending so you can cut costs (“woah, why have I been spending $1,500 a month on cloud hosting services??”).
How do you get a handle on your finances?
If you’ve already got Small-Books taking care of your books, that’s a great start. But in a down-economy, it’s critical that you as the business owner understand your revenue and expenses. What’s your month over month net income telling you? According to your last profit and loss statement, how have your expenses changed? Is revenue really down, or is this a slow time of year? (Last year’s statements will help you with this one).
The key to staying in control during a recession is knowing the numbers so you can make informed decisions. No more queasy feelings in your stomach, “I think I’m doing okay financially.” You’ll just know the answer, whether it’s good or bad. That is really important during a financially uncertain time.
2. Cut costs if you need to
During these tough times, every dollar matters. Raw materials are more expensive, talent is more expensive. It’s as good a time as any to scrutinize your finances, and be prudent with your spending.
How do you know where to cut back?
While you can’t cancel all of your subscriptions and services, now is a good time to re-evaluate them to see if you’re getting your money’s worth. If you’re not, then it might be time to hit pause on those subscriptions or find a cheaper alternative.
If you’ve lost track of all the services you’re paying for (let’s hope not), Small-Books members can review all their recent subscription purchases under the expense category “subscriptions” and get a list of all the services you’re subscribed to. You can ask your Small-Books bookkeeper to send you the report, or log in to your account and view it yourself!
3. Do more with your assets
This is another thing you should be doing, recession or not. But it’s particularly crucial to do this if you plan on surviving a recession. With inflation levels hitting 7.7% - the largest yearly increase since January 1983 - our dollar is effectively losing it’s value every day. So the best way to protect your business is to start by looking at the assets you already own.
How do you make the most of assets you already have?
Here are some tips:
Got excess or outdated inventory? Maybe it’s time to clear stock with a promotion.
Are your clients behind on payments—or, in accounting speak, do you have lots of accounts receivable on the assets side of your balance sheet? Maybe it’s time to have an awkward-but-worth-it chat with them about paying their invoices on time
Did all of that and now you have some excess cash on hand? It may be a good time to think of ways to re-invest that money into the business (before your money devalues any further).
4. Offload higher interest debts
Once you’re done looking at your assets, it’s time to look at the number one killer of small businesses during recessions: debt and interest payments.
The more debt you have, the more cash you need to make your interest and principal payment, and with rising interest rates, your payments can get away from you. This makes for a bad situation in any regular economy, but during a recession, it can put your business into a downward tailspin.
How do you get a handle on your debt?
Prioritize debts from highest rate to lowest rate, and start paying down the highest rate debts. High-interest rate debt should be addressed first since you do not want that to accumulate and become a greater debt in the future.
You can also look at restructuring your loans by using equity to pay off the higher interest rate loans.
5. Take the long view, and don’t be reactive
So what exactly is the recession-survival secret? Well maybe there isn’t one.
Let’s say those forecasts about a coming recession are correct. Is there anything you should do differently to prepare for it today? The perfect formula to success?
The answer is really just: run your business the way you should have been running it all along.
For example: you should be paying attention to your expenses. You shouldn’t be spending more money than necessary. This is true regardless of a looming recession.
So instead of reacting to the latest forecasts, small businesses are better off doing what they should always be doing: not overspending, making sure they have a financial cushion, and keeping an eye on the long term.
Somebody who is very worried about a recession should position their business to withstand a year of negative growth. This is a useful strategy when you start a business in general, regardless of the current economical environment. So, if you haven’t already, maybe now’s the time to go to your bank and say hey, can you extend me a line of credit? Not necessarily to use it, but just to have it there in case.
This calm and collected approach might seem a bit unnerving to some entrepreneurs, but reacting according to an external circumstance rather than your own business indicators (spending or cutting based on a potential recession when it doesn’t make sense for your business) is more likely to have a negative effect on your business’ performance.
Firms that cut costs faster and deeper than rivals don’t necessarily flourish. Businesses that boldly invest more than their rivals don’t always fare better either.
It seems like the best way to respond to a recession is to not react at all, and to instead focus on running a healthy, efficient, profitable business.
Surviving the stress test of a recession
Getting your financial act together, doing more with your assets and keeping your debts low aren’t some kind of miracle cure for your business. They’re things that successful businesses are already doing, all the time - recession or not.
What changes during a recession is that these things become a lot more important. In fact, they could make or break your business during an economic down-turn. So while you might be able to get away with not knowing your exact financial position during the good times, when business gets tight, it can mean the difference between bankruptcy and survival.
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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Small-Books assumes no liability for actions taken in reliance upon the information contained herein.
