How to Prepare Your Small Business for a Recession

The American economy has enjoyed a robust few years, and the business sector has been reaping the benefits of a strong economy. Profits are up, unemployment is down, and consumer confidence is at an all-time high. Frankly, things couldn’t look rosier. But are there storm clouds on the horizon?

While no one is predicting a recession on the scale of 2007/2008, it’s hard to ignore the potential for a downturn in the markets. In a recent survey conducted by the National Association for Business Economics 72% of the economists polled expect a recession before the end of 2021, while 38% of respondents predicted a recession by the end of 2020.

Small Businesses Often Get Hit the Hardest

Small business owners tend to take the hardest hits during any recession. Without the substantial resources of larger corporations small businesses and start-ups are more susceptible to failure during an economic downturn. If we look at the financial crisis of 2008 to 2010 we see that upwards of 1.8 million small business owners were forced to close their doors as a result of great recession.

Again, no one is predicting that level of economic disruption. But the fact remains that small business have a tougher time weathering upsets in the economy, and small business owners need to prepared for the worst if they are to survive an oncoming recession.

The Time to Prepare is When the Economy is Strong

When times are good, as they have been for the last few years, it can be easy to ignore the signs of trouble down the line. But now, while we’re riding the crest of the wave, is the time to prepare for a potential downturn. If, as small business owners, we want to weather the coming storm (whatever its size or duration) the time to act is now.

Build Up Your Cash Reserve

In a recession it’s pretty much a given that sales will taper off and cash flow will become strained. It’s also a given that banks will be more hesitant to underwrite large loans to help out struggling businesses. So, in order to keep the engines of commerce running, you will need to have cash available to cover your operating expenses and pay your employees.

Now, while the economy is strong and business is good, is the time to look at your cash reserve and take steps to add some heft to your bank account. As a general rule, small businesses are advised to have at minimum a cash reserve that is equal to no less than three months of standard operating expenses. If you want to be better prepared for a potential recession it’s recommended that you increase that to six months or more. This will provide a more effective financial cushion should trade drop off and your regular cash flow dips below norm.

Secure New Business Lines of Credit

Securing a bank loan or extended line of credit is a challenge for small businesses in the best of times. But during a recession, when even the banks are tightening their belts, it becomes much more difficult. We need only look back to the last recession to see how tightfisted the banking industry became with their financing. Banks all but stopped lending to small business owners, and most remain skittish even now that the economy has recovered.

The best time to apply for a bank loan or a new line of business credit is when you don’t actually need it. It may be counterintuitive, but it’s also the first rule of business financing. Now, with the economy strong and your business thriving, is the time to apply for new financing. Banks will be much more willing to extend new lines of credit which will definitely help you and your business navigate the chopping waters of a coming recession.

Reconsider Large Investments

When business is good and your cash flow is positive it’s only natural to think of ways to expand your business. New equipment, store renovations and new product lines all sound like smart investments when times are good. But with economists predicting a potential recession within the next year or two it might be wise to rethink some of those plans.

Before you commit to any large-scale projects review your plans and consider what kind of financial strain it may place on your business. What is the return on your investment, and will the completed project enhance or diminish your ability to weather a financial downturn? When your business is prospering expansion is a smart choice, but if you overreach you could be setting yourself up for trouble down the road.

Reduce Your Inventory

One of the greatest hazards facing small businesses during a recession is being caught with extensive back stock that is sitting dead on the shelves. Inventory accounts for a larger part of your financial investments, and during a recession you may find it difficult to move stock and recoup on those costs. Worse case scenario you may have to liquidate your inventory to boost your cash flow, taking a loss on that investment.

Now is the time to reassess your inventory management and tracking systems to find ways of reducing your standing stock. A leaner inventory will give you greater flexibility if the economy slows, allowing you to respond to changes in the market quicker and with minimal loss of investment capital.

Reach Out to Partners and Vendors

No one experiences a recession in a vacuum. Your partners and vendors will be wrestling with the same financial obstacles, and some of them may fall by the wayside. Now is the time to reach out to your business partners and product suppliers to talk about preparing for a potential economic downturn. Find out if they have plans in place to weather the storm so that business can continue uninterrupted.

If necessary, it may be wise to connect with new suppliers to ensure that you still have access to products and materials should one of your primary vendors fall foul of the recession.

Manage Your Debt

When budgets are forced to tighten due to a recession debts can begin to balloon out of control. Larger enterprises may be able to steer into the skid so to speak, but smaller businesses rarely have that kind of financial wherewithal. If you are going to survive a recession you need to take steps to reduce your debt obligations now while times are good.

Take a look at your business’ outstanding debts and prioritize your payments. Start with the higher interest loans first, and then move on to paying down any other outstanding debts. Remember, during a recession cash flow will be reduced and you may find it difficult to keep up with your creditors. If you can pay down that debt now, while business is booming, you will be better prepared to ride out any potential financial storms.

Finally

It is impossible to know exactly when the next recession will hit. But markets are cyclical, and sooner or later there will be an economic downturn. It is as inevitable as the sun rising in the East. As small business owners it is up to us to be as prepared as we possibly can be for a new recession.

Now, while the economy is strong and business is good, it’s time put your recession survival plan in motion.