You don’t need to be an economist to know that a recession is looming in this country. Most major financial indices show that the stock market is tanking. Inflation, especially fuel prices, continues to skyrocket, despite rising interest rates. Rising prices are forcing consumers to purchase only essential goods, and two years on lockdown due to the COVID-19 pandemic have them drifting more towards purchasing services such as travel packages and dinners out than physical products.
Unlike the recession caused by the COVID-19 pandemic, small businesses don’t have Economic Injury Disaster Loans (EIDL) or the Paycheck Protection Program to fall back on this time around. Even the Employee Retention Tax Credit, a program designed to encourage businesses to retain employees during the pandemic, has expired.
The good news, however, is that there are several steps you can take to prepare your business for a recession so that your company may survive and be in a great position to thrive once the economy bounces back.
#1 Cut Operational Costs
Obviously, revenues often fall short of costs during a recession, and this often presents a painful conundrum for small business owners – how do you cut costs without crippling your business? Worse yet, how do you tell loyal employees that you have to let them go? While it’s a daunting task, the first thing that must be done is to separate your essential from non-essential costs and see where you can pare back. Some suggestions:
- Cut down or eliminate the purchasing of less popular inventory, while focusing on having the most popular items in stock.
- If you outsource services such as marketing or payroll, for example, you should consider moving some of those services in-house if possible.
- During a recession, business owners need to adopt the mindset of doing more with less. Therefore, you might have no choice but to furlough employees or, better yet, make them contract workers. This, of course, will make you and your remaining staff busier as you will have to absorb the work these employees would have produced, but this may be necessary during difficult economic conditions.
- See where you can cut down on office supplies, especially big-ticket items.
- If your business operates out of an office, small business owners may want to consider a smaller space while allowing non-essential workers to work from home. This trend is already happening because of the pandemic, so it shouldn’t be too difficult to implement.
#2 Be Creative in Your Product Offerings
It’s important to remember that you’re not just a business owner; you’re also a consumer in your personal life, and therefore, you need to let your customers know that you’re feeling the same economic pain as they are. See if you can bundle popular products or hold regular discount sales to show customers that you understand what they’re going through and that you’re willing to help them. This can maintain a positive cash flow during a recession while retaining loyal customers.
#3 Adjust Your Marketing Efforts
The first thing that often gets cut during a recession is the marketing budget. While there may be opportunities to save costs in that area, you must remember that your greatest assets during a recession are lifetime customers, as they are the ones who most likely will continue buying from you when times are tough. Therefore, it will be important that you focus more heavily on marketing and selling to them during a recession.
Change your marketing approach by offering repeat customers special discounts as a way of showing them that you appreciate their business. As stated above, let them understand that you feel their pain during these difficult economic times, and that you’re willing to cut prices for them on certain products. Doing this will go a long way towards ensuring your business not only survives the recession, but comes out stronger on the other side.
#4 Have an Honest Chat
Your employees keep your business going just as much as you. During a recession, it’s important to have an honest, sit-down discussion with your remaining staff. Let them know that there is a recession and that sacrifices will have to be made in order for the business to survive. These sacrifices don’t have to be job losses. These can include seeking a cheaper benefits plan (if you offer them), possibly cutting down their hours and letting them know that they may need to produce more work to compensate for the fact that others were let go.
In all likelihood this is going to be an uncomfortable conversation to have. You can explain to them, however, that recessions don’t last forever and that the situation will improve once business improves. They will probably appreciate your honesty.
#5 Get Your Financing in Order
Getting your financing in order just may be the most crucial element in your plan to survive a recession. The first thing you should do if your small business has a lot of debt and you aren’t in the position to pay it all off now, is consolidate or eliminate that debt by taking out a lower-interest term loan, or negotiate a better deal with lenders for a lower rate or even try to get them to agree to receiving interest-only payments until business picks up again. Also, try to pay off as much debt as you can at the onset of the recession.
Second, if you don’t have much financing, you might want to consider strategically applying for more. A business line of credit may help you keep up with payroll and other expenses during a slow period. Government-guaranteed financing such as a long-term SBA 7(a) loan (if you qualify) can provide you with a relatively inexpensive way to gain funds to keep your operations going during a recession. Invoice factoring can help you get immediate cash for your outstanding invoices, while purchase order financing can get your suppliers paid right away.
Of course, it may seem counter intuitive to add debt as a way to survive a recession, but remember: recessions don’t last forever. You’d be taking on this debt as a convenience to get your bills paid, and when economic conditions improve, you’ll be in an even stronger position to succeed.
Whether we like it or not, we are at the onset of a recession in 2022 and most likely part of 2023. This is a double whammy for small businesses that were already troubled due to the pandemic. Careful financial planning and examining ways to operate your business more cost-efficiently now could mean the difference between still existing in 2024 or shutting down over the next year-and-a-half.