Worrying about a recession is stressful. But preparing for one can make both potential and real recessions less damaging.
Here's what you need to know:
- There’s no way to completely recession-proof a business, but being prepared can go a long way toward ensuring that your business makes it out on the other side
- Reducing costs can help cushion your small business through a recession
- Upskill your employees and assess your workforce needs
- Take advantage of flexible work and work from home arrangements
- Build flexibility into your client contracts and start saving additional cash reserves now
- Source financing options before you need them
The pandemic led to an economic crisis. Inflation and interest rates are soaring. Talk of a looming recession continues.
So much of these major shifts and issues are out of our hands. Regular people and business owners can’t stop a recession any more than we could have stopped the pandemic. But one thing people can do is recession-proof their small business.
Really, there’s no way to completely recession-proof a business. Any economic downturn will have an impact on most any small business.
But being prepared for what could come can go a long way toward ensuring that your business makes it out on the other side.
Are you a brand-new business owner who hasn’t stared down an economic recession yet and don’t know where to start? Maybe this isn’t your first recession, but you know how important it is to be prepared and part of being prepared means being up-to-date.
Whatever your reason, here are tips and tricks for recession-proofing your small business.
Understanding what a recession is and how to identify one
The first step in recession-proofing your small business is understanding what, exactly, a recession is and how to identify one.
As Stijn Claessens and M. Ayhan Kose of the International Monetary Fund write, “There’s no official definition of a recession. But there is consensus around what a recession looks like. “The term refers to a period of decline in economic activity,” they write.
They note that short periods of economic decline are not recessions. It’s generally accepted that 2 consecutive quarters of decline in a country’s gross domestic product (when controlled for inflation) equals a recession.
Claessens and Kose note that while recessions are rare, they are often costly. Only 10% of the time between 1960 and 2007 has been spent in a recession, they say.
While most recessions last for only about a year, they can do a lot of damage in that time. “A recession is usually associated with a significant decline of 2% in GDP,” they write. “The unemployment rate almost always jumps and inflation falls slightly because overall demand for goods and services is curtailed.”
So what does all of this mean for your small business? As the Federal Bank of New York wrote in 2011, “although both large and small businesses felt the sting of job losses during the 2007-09 downturn, small firms experienced disproportionate declines.”
This generally comes from 2 sources: a tight credit supply and a weakened consumer demand for the products and services of small businesses.
Recession-proofing your small business: Cutting costs
Naturally, reducing costs can help cushion your small business through a recession. One of the main ways that large corporations handle this is with layoffs. Small businesses, on the other hand, can’t (and often don’t want to) resort to this measure as easily.
Instead, there are other things you can do. Are there software services that are nice to have but not necessary business expenditures? If so, don’t renew those contracts when they expire or consider ending them early.
Were you planning a major rebranding for 2023? That might not be the most necessary work to undertake during a recession when you’re going to perhaps have less business anyway. Instead, it might be a good time to upskill your current employees and let them handle some of your rebranding efforts.
Upskill your employees and assess your workforce needs
Speaking of upskilling, a recession is a great time to take the gas pedal off of sales and focus on developing the skills and upskilling the employees you already have. This way, if the recession means that you need to pivot your business, you’ll have employees baked in who are ready to tackle this new work without skipping a beat.
Assessing your workforce needs doesn’t mean letting people go. Take a good look at your org chart and ask yourself whether or not your workforce is truly organized in the most efficient way.
If not, shift things around. Give more work to larger teams with lower outputs. Streamline management choices so there aren’t unnecessary divisions between teams doing related work.
A recession is a great time to look at where you’ve been, reassess where you are, and think about where you want to go.
Take advantage of flexible work and work from home arrangements
If the pandemic wasn’t the start of a remote work situation for your business, an upcoming recession can be. The pandemic proved that plenty of the work most Americans do can be done from home thanks to the internet and other technologies.
Office space costs money and when you’re looking for costs to cut, this can be a significant one.
You can accommodate a smaller office footprint with the same number of employees by utilizing flexible work arrangements.
Reduce office space costs by shrinking your footprint or eliminating a physical office space altogether. You can accommodate a smaller office footprint with the same number of employees by utilizing flexible work arrangements.
Employees can work from home 4 days a week and come to the office for 1 day or any other arrangement that works for your business.
If you eliminate office space altogether, that doesn’t have to mean the end of in-person work or meetings. You can take advantage of coworking spaces or coffee shops.
Managers and those in leadership positions can host work events in their homes if that’s something they’re willing to do. An unintended benefit might even be increased team bonding!
Build flexibility into your client contracts
If you have contracts with service providers, see if you can inject extra flexibility into them. Especially if you’ve been working with a particular service provider for some time, they might be open to this.
You’ll likely have to make tradeoffs for the flexibility in the form of a higher rate or a small flat fee for cancellation. But if finances get tight during a recession, having the option to quickly eliminate ongoing costs is worth its weight in gold.
Start saving additional cash reserves now
Additional cash on hand and cash reserves will also come in handy. If you can, create an emergency fund to cover 6 months of the cost of running your business.
This should include everything from payroll to rent and utilities. If you have any outstanding payments that your business has yet to collect on, now is a great time to shore up those debts.
Source financing options before you need them
This can include inquiring at a local credit union or asking your local small business association about funding sources.
There’s a lot of paperwork that goes into securing a line of credit or selling off assets that can take up a lot of time. And time can be one thing you don’t have a lot of if you find yourself in a pressing financial pinch.
Start asking about lines of credit today. Just because you have it doesn’t mean you have to use it. Conduct an up-to-date valuation of your business assets in the event that you need to sell something to cover payroll or other essential costs.
Renegotiate current payment terms on loans and other debts to extend them if you can. If you’ve been meaning to improve your business’s credit rating, now is an excellent time to get to work on that.
Worrying about a recession is stressful. But preparing for one can make both potential and real recessions less damaging. An old saying seems to aptly apply here: An ounce of prevention is worth a pound of cure.