How to Prepare Your Business for a Recession
October 18th, 2022 | Small Business Resources
The U.S. is not officially in a recession. But inflation is up, and interest rates are rising, leading many to expect an economic downturn.
As a small business owner or freelancer, it’s okay to feel worried about what the future holds for your company. Don’t stay down for too long though—now is the time to prepare.
Shortly after the great recession of 2007-2009, a Harvard Business Review study showed that companies that prepared for a recession fared better than those that didn’t. To help you sustain your company, we’ve explained how to prepare your business for a recession.
But first, what is a recession exactly?
A recession is a huge drop in economic activity that lasts more than a few months, typically six. It can be triggered by a mix of different factors—like stock market crashes, high inflation, rising unemployment, and stagnant wages.
In the U.S., a recession becomes official and is declared by the National Bureau of Economic Research (NBER) after two back-to-back quarters of negative GDP (gross domestic product) growth.
What happens in a recession?
When a recession hits, businesses’ sales typically drop, or they close down in extreme cases. With less income, companies will likely slow down hiring and consider removing non-essential roles. Also, employees—who survive the metaphoric layoff ax—may experience pay cuts or stagnant wages.
Based on their expert discretion, the Federal Reserve may try to stabilize the US economy by increasing interest rates. In 2022, this is already happening; responding to widespread inflation, the US Federal Reserve has raised interest rates by 0.75% for the second time.
At times like this, lenders may earn more than their forecasts. But higher costs make borrowing money more expensive for consumers and entrepreneurs (like you).
People with cash in the bank could also earn more on their savings accounts because banks may pay better returns on savings accounts when interest rates are up—to increase deposits.
Ultimately, the government uses a “carrot and stick” method to regulate purchasing power, stabilize prices and match demand to supply.
4 things to prepare your business for a recession
Knowing what a recession is, is the first step in creating a recession-ready business. The next steps involve saving money, boosting earning capacity, cutting costs, and improving operations.
1. Build out cash reserves
A recession can last anywhere from a few months to several years. The last thing you want is to get cash-strapped midway.
Beef up your cash reserves by finding ways to reduce outgoing cash, like negotiating discounts with vendors or agencies and handling bookkeeping yourself.
If you want to ask for discounts, start with suppliers that you already have a great relationship with and that receive on-time payments from you. You can also consider new suppliers with better pricing. Just check that the vendor meets your quality standards before switching.
As for handling bookkeeping in-house, Neat was made for that exact reason: to be an all-in-one financial management toolkit for small businesses. Try it for free today.
To improve your chances of receiving future loans, double down on removing debt. Start with high-interest debt payments and work your way down to low-interest loans. These payments will help you show lenders that you’re creditworthy.
2. Find new business opportunities
In the thick of a recession, your regular revenue streams and accounts receivable may not flow as usual. But some sectors—like healthcare, basic transportation, and food—are relatively inelastic and will likely continue performing as normal.
Consider your product and see if you can win new customers within these essential industries. Ask yourself, what offers do you have that can appeal to these potential buyers? If you come up blank, consider tweaking some of your existing offerings or introducing new ones.
Say you manage social media accounts for a monthly fee. You can expand your customer base by pitching social media management services or one-off digital campaigns to grocery stores and pharmacies.
With alternative cash flow sources, you can build business resilience ahead of the next recession.
3. Don’t rely on layoffs
As upsetting as layoffs are, your first instinct during an oncoming recession may be to let go of some staff to cut costs. But this reduction in expenses often isn’t worth it, as layoffs also have negative short- and long-term effects—like employee disengagement, reputation damages, and increased hiring costs in the future.
As ex-Honeywell CEO David M. Cote said, “Most managers underestimate how much disruption layoffs create; they consume everyone in the organization for at least a year. Managers also typically overestimate the savings they will achieve and fail to understand that even bad recessions usually end more quickly than people expect.”
When you fire several workers at a time, the remaining staff may feel that they’ll soon be next. This worry could have a ripple effect on their trust, productivity, and loyalty.
So ideally, you want to come out of the recession without letting any of your staff go. Instead of layoffs, try to reduce overhead and boost profits with mandatory unpaid leaves (also called furloughs) and shorter workweeks—four days instead of five. If layoffs are inevitable, limit them to redundant roles and help impacted team members find new opportunities.
4. Boost efficiency with automation
There’s a good chance you already have some automated processes in your business, like bill payments and report generation. But chances are, there are a few automation opportunities you’ve missed.
Given the current state of the U.S. economy, now is the time to embrace technology. When you automate tasks that you were previously handling, you won’t just save time—you’ll also minimize future hires and improve your operational efficiency ahead of the economic slump.
Ditch unreliable manual processes for apps that’ll automate tasks and let you deliver quality service consistently, from customer communication to bookkeeping and tax prep.
If you’re wary of spending too much on new software, explore all-in-one tools, like Neat, so you don’t have to use a separate app for each task. Our financial management software helps you automate invoicing, online payment, documentation, and bookkeeping processes. Neat is, in our not-so-humble opinion, a super tool!
Resist recessions with visionary leadership and planning
A recession could hit next month, next year, or in 10 years. But the mark of a recession-ready business is the ability of leaders like you to look into the future, anticipate changes, and plan accordingly.
Don’t reserve recession planning for when everyone is panicking. Be intentional about your company’s finances all year round, and don’t be afraid to experiment where possible.
You’ve got this, and we’re rooting for you!
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