Can Small Businesses “Recession-Proof” Themselves?
If you’ve owned a small business in the last 20 years, chances are you’ve experienced the direct effects of at least one recession. From the dot-com crash at the turn of this century to the housing-led Great Recession of the late 2000s and the pandemic-induced recession of 2020, small businesses across the US have had to deal with several major economic disruptions.
Halfway through 2022, small business owners are facing the prospect of yet another downturn. While the US entered a technical recession on July 28th after two consecutive quarters of negative GDP growth, the current debate among economists is whether the country is actually in a full-blown recession or if the worst is yet to come. Regardless of any technical definitions, there’s no doubt that the country is experiencing an economic downturn that is leaving small businesses especially vulnerable.
With the threat of a recession looming so large, how can small businesses protect themselves? For small business owners, the time to recession-proof their business is now: recessions are an inescapable part of the economic cycle, and the question is not if but when the next one will hit.
Having a recession-proof small business strategy is essential in these challenging times. This article provides a guide to help business owners recession-proof their businesses and protect themselves against the risks of another economic downturn.
Small Businesses Worried About a Recession
Several surveys released over the last few weeks have made it very clear that small business owners are deeply worried about the prospect of an upcoming recession.
For example, the most recent results of the quarterly CNBC/SurveyMonkey Small Business Survey showed that small business confidence dropped to a new all-time low due to inflation and recession concerns. The confidence scores registered among small business owners were the lowest since the survey began in 2017, with 38% citing inflation as the biggest threat to their business. These results are in line with the results of the 2022 Embroker Startup Risk Index Report, where 26% of startup founders identified inflation as the number one external risk faced by their company.
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As reported by ZDNet, another recent survey showed that almost half of small business owners fear that a recession will happen before 2022. The results indicate that small business owners are entering the second half of the year with a high level of anxiety. These sentiments are even more evident in a report by Goldman Sachs where 93% of small business owners expressed worries that the US will enter a recession over the coming months. A majority of the firms surveyed stated that they believe the country is headed in the wrong direction. Similarly, a survey by UpCity and Pollfish showed that 80% of US small businesses are concerned about an upcoming recession.
Though slightly varied, these results clearly show the general sentiment that has affected businesses both large and small throughout this year. Businesses nationwide are facing a host of issues that are creating a perfect storm for a recession. From persistently high inflation and rising interest rates to the continued effects of war and other geopolitical conflicts, there’s no shortage of things to worry about.
Why Small Businesses Are More Vulnerable During a Recession
While economic downturns impact everyone, small businesses are particularly vulnerable to the effects of a recession. Unlike large corporations, many of which benefit from substantial profits and privileged access to financial and credit markets, small businesses often have no financial safety net to help them offset the pain of a recession.
Small businesses also face challenges due to changes in the behavior of their customers during a recession. People tend to buy less and consume less during economic downturns, leading to lower demand for the products and services offered by small businesses, especially by those in niche markets. At the same time, customers might take longer to pay for products and services, negatively affecting those businesses’ cash flow.
Worse yet, many small business owners struggle to access much-needed credit during recessionary periods, making it harder to keep their businesses going without any capital infusions.
It’s no wonder then that business owners are worried. And it’s also why they need to plan for the future and recession-proof their businesses in advance.
Strategies for Recession-Proofing Your Small Business
Having a recession proof small business requires a lot of careful planning and preparation. Here are 10 steps to creating an effective plan for recession-proofing your small business:
1. Manage Your Costs and Cash Flow
The most effective way to save on business expenses during a recession is by managing your costs and keeping track of your cash flow. This will include reducing spending wherever possible by micro-managing your expenses. Can you cut back on overhead expenses? Is there any excess inventory? Do you need to introduce shorter payment terms for clients? Are there ways to encourage your clients and customers to make early or even advance payments? Consider these questions as you prepare to make any decisions about the state of your business expenses.
2. Create a Profit Plan
If your business is profitable, ask yourself which of your current business operations might need to be cut back during leaner times for you to remain profitable. For owners whose businesses are not profitable, it’s crucial to look for ways to adjust business practices and work towards profitability, because a recession might permanently sink the business into the red. Having a profit plan will help keep you motivated and focused on your essential priorities.
3. Secure Financing in Advance
If you’re able to secure financing on reasonable or even favorable terms, don’t wait until a recession hits before taking advantage of that opportunity. One of the first effects of a recession is that lending and credit standards begin to tighten, so that small business owners can easily find themselves shut out of any financing opportunities. Remember also that financing takes time: whether it’s a bank loan or building up your personal savings, you need to start as soon as possible regardless of whether a recession is right around the corner or not.
4. Have a Risk Assessment Strategy
Small business owners should assess the risks faced by their businesses as frequently as possible, preferably daily. You should make plans to keep track of any changes in economic conditions that will affect you, and decide whether you have the tools to respond to those changes effectively. Does your business have a risk assessment plan to deal with rising interest rates, for example? Small business owners should always be able to react in real-time without delaying important decision-making. Don’t let events get ahead of you.
5. Take Care of Your Employees
Your employees are crucial to the success of your business, and that is especially true during a recession. Remember that a recession is as stressful on your employees as it will be on you. Stay in constant contact with your staff and inform them of any important business decisions that will impact their welfare. Consider investing in additional training to keep them adaptable and agile in preparation for any downturn. If you have to make the painful decision to resort to layoffs, consider implementing an effective and conscientious entrenchment strategy.
6. Nurture Customer Relations and Client Relationships
Make sure you have the resources to devote to valued customers and clients, to keep them loyal and maintain their trust. Nurturing those relationships might involve being more selective about the kind of customers and clients you want for your business. Over the medium and long term, it’s more important for a small business to invest in fewer customers and clients who are reliable and will stick with you during a recession. You should be able to identify your best current customers and clients so that you can invest in those relationships. They will be your best ambassadors, and might even help bring in new customers and clients to your business.
7. Connect with your Business Partners and Suppliers
Recessions affect everyone, and will impact your partners and suppliers just as much. That’s why small businesses should be in contact with their partners and suppliers, so that they can devise strategies that can jointly help protect their businesses. Having such discussions might also convince you to seek other partners or suppliers if your current ones are not as likely to help you stay afloat during a recession.
8. Create a Unique Brand, Message, and Products
Small businesses need to have an effective brand and messaging strategy to remind their customers and clients what they’re all about. What are your values as a company? What makes your business unique? What kinds of products and services do you provide that your customers can’t get anywhere else? Business owners have to give their customers and clients a reason to stick with them during a recession instead of looking for cheaper alternatives. Being recession-proof requires keeping your customers and clients happy and loyal.
9. Diversify Your Products and Services
At the same time, small businesses should look for ways to expand their product lines or services and create multiple revenue streams. One effective way of diversifying your offerings is to make your products and services available at different price points, to give your customers and clients more options and thereby increase your revenue. Such diversification will help your business be more flexible and adaptable in advance of a recession.
10. Get the Right Insurance Coverage
Having the right insurance coverage is one of the most effective ways for small businesses to be recession-proof. Recessions tend to increase the number of risks and challenges that small businesses face, so that having the right insurance policies in place becomes even more important. For small business owners looking to get the right coverage, Embroker’s Ultimate Guide to Small Business Insurance provides a thorough overview of all the policies you will need to protect your business.
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Takeaway: Helping Your Business Get a Head Start
Small businesses are facing an unprecedented period of uncertainty, with several economic headwinds seemingly pulling the economy toward a recession. Having a recession proof small business strategy should therefore be a priority for any business owner right now. By implementing the strategies outlined in this article, business owners can plan ahead for a potential recession while preparing for any outcome that may lie ahead in the near future.
Ultimately, recession-proofing your small business will allow you to get a head start on your competition and can even help you level the playing field compared with much larger corporations. In this way, preparing for a recession can help small businesses remain adaptable and competitive.
