As a small business owner, you’re in control of a lot of things. You hire and fire staff, set the marketing budget, choose your suppliers, and make a host of other decisions, big and small. But there are plenty of things you can’t control that can have a massive impact on your business—like the state of the global economy.
Recessions, in particular, create a lot of uncertainty for business owners. You won’t know how long the downturn will last, how deep it will get, or what types of businesses will be hit the hardest. Of course, the first worry for any business is that revenue will slump when the economy starts to contract. Consumer spending slows when people lose their jobs or even when they fear they might. But a recession can also create other unexpected bumps, including slow-to-pay clients and issues with suppliers.
While you can’t control what happens to the economy, you can control how well you prepare for the unexpected. Here are 6 ways to recession-proof your business:
Consumers cutting back on their spending is the first and most obvious effect of a recession. Different industries will feel the pinch at different times and in different ways, as people cut out what they think of as luxuries first. Regardless of their industry, a business owner should think about diversifying their customer base. Relying on a few big customers or a single demographic—whether it’s new parents or business lunch meetings—carries a certain amount of risk in stable economies, but becomes even riskier in a downturn.
Solution: Build up your cash reserves. It’s common financial sense that you should have emergency funds in your personal bank accounts; so should your business. Aim to have enough cash on hand to cover at least three months’ worth of expenses, including payroll.
If you work with corporate customers, or you’re a service business that invoices clients rather than collecting payment at the point of sale, you’ll likely find that those payments start to slow down in a recession. Make sure you’ve got a solid system for not only invoicing promptly but also following up with reminders on a regular schedule. A recession is also a good time to revisit your late fee policy—if you don’t charge them for paying late, should you start? If you do, should you forgive late payments from loyal clients?
Solution: Apply for financing before you need it. The best way to prepare your business for delayed payments is to have financing on hand before you find yourself in a cash-flow crisis. A line of credit or another flexible financing option, like an advance on future payments, could be a real lifeline in a recession.
From a business perspective, the hardest thing about a recession is the uncertainty. You don’t know when or how quickly the economy will recover, so it’s almost impossible to predict when your revenue will start to rebound. Consider some creative tactics for boosting your foot traffic or fighting seasonal slumps, which may be even more pronounced in a downturn.
Solution: Cut discretionary spending. To recession-proof your business, be very cautious about making large investments in expanding your business or acquiring new equipment. Look for ways to cut your overhead expenses, including rent, utilities, insurance, advertising and PR agencies, and anything else that isn’t directly related to creating and selling your product.
A recession will affect your vendors and suppliers, too. Some will respond the way you would—by cutting expenses where they can, pushing for prompt payment of invoices, and looking for creative ways to build customer loyalty. But not every business will survive a severe downturn. Consider what would happen if you suddenly lost one of your regular suppliers, or if your landlord decided to sell your building. The time to think through those scenarios is now, not when the downturn hits.
Solution: Strengthen your relationships—and build some new ones. Strong relationships will help you weather any storm. If you’ve been a good customer, you may be able to ask for a cost reduction in exchange for continuing that long-term relationship. But a recession is also a good time to look for alternate vendors and make some contingency plans.
If your business invests in the market, a slumping stock market will intensify your cash crisis. Investing can be a great way to build up your business’s assets, but you have to align your investment strategy with your risk tolerance. And depending on your age and personal investment goals, the level of risk you’re comfortable accepting on behalf of your business may be different than your risk tolerance in your personal investments. Make sure you set up a strategy that you can stick with when times get tough.
Solution: Diversify your portfolio. Don’t make any sudden changes when stocks are already tumbling. But do look for ways to diversify your corporate investments away from your own industry. It’s always tempting to invest in an area you feel you know well, but because your income comes from your business, you’re already heavily exposed to any downturn in that industry. A diversified portfolio is your best defense against a recession that hits your industry particularly hard.
In a small business, there’s no hiding tough times from your employees. They’ll know that sales are down or that foot traffic isn’t what it used to be. They’ll probably start worrying about layoffs long before you even consider them.
Solution: Be transparent, and consider layoffs as a last resort. Managing staff morale is crucial to getting through a recession. You don’t have to open up your books to every employee, but do make sure you’re being honest with your staff about the challenges you’re facing. Look for ways to reduce your staffing expenses without actually cutting jobs, if you can. Layoffs are always an option, of course, but your staff will be grateful if they see you working to save their jobs.
Sooner or later, every business has to weather an economic downturn. A prudent business owner always keeps that in mind. The idea is not to let fear of hard times keep you from taking any risks to grow your business, but to think about ways to recession-proof your business in advance, so you’re not left scrambling when consumer spending starts to slide. You may not be able to control the state of the economy, but you can control how prepared you are for a bad quarter or a bad year. Ultimately, recession-proofing your business will give you the confidence to face any kind of economy.