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How to Prepare Your Business for a Possible Recession

November 22, 2022  - Tips for Small Business
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Facing a possible recession can be scary, especially for small and mid-sized businesses. While the factors involved in a recession are often out of our hands, there are practical steps we can take to prepare. From creating a strategy to identifying financing options, these four tips will help recession-proof your business.

1. Create a Recession Business Plan

The first thing you should do is make a recession strategy for you and your business. Start with a few scenarios, including a best-case and a worst-case scenario. Think about possible circumstances, drawing from your own experiences and the experiences of others.

Include goals for each scenario. Write down quarterly, yearly and long-term goals. List action items to accomplish over several months so you’ll know exactly what to do. Being thorough here will help you avoid feeling overwhelmed in the event of a recession.

As you make a recession strategy, don’t forget to include one for yourself. Running a business is tough, even during a thriving economy. During a recession, it’ll be important to manage your own stress. Be sure to schedule time for your well-being, so that you can make decisions with a clear head.

2. Evaluate & Prioritize Your Cash Reserves

Businesses can’t survive without cash flow, which can end up being squeezed during a recession. Assess your current liquidity to know where you’ll stand should your cash flow minimize or grind to a halt. Fortunately, there are practical actions you can take to prepare for this scenario.

diagram showing the different factors that impact cash flow

Go over your books

Now’s the time to work with your accountant and examine your financials. Understand your profit margins and monthly sales. Look for any unnecessary expenses that you can cut out. Drop any products or services that are unprofitable. Review your inventory and see where you’re overspending and overstocking.

You may also want to examine your operational expenses. There may be ways to consolidate these expenses or find inventive ways to streamline them. 

Examine your debt & get in touch with lenders

Take a look at your current obligations and how different actions will affect your cash flow. Paying debt off early may seem attractive but could impact your cash reserves during a recession. On the other hand, large amounts of debt will be difficult to manage when profits are slim.

Manage your debt carefully as you research forecasts and possible outlooks. Communicate with your lenders and see what choices are available to you in the case of a recession. You’ll be better positioned to take corrective actions by learning all your options ahead of time.

Build an emergency fund

One way to prioritize your cash reserves is by building an emergency fund for your business. Just like a personal emergency fund, you’ll ideally put some money aside each month or quarter as a safety cushion for your business. Aim for 3-to-6 months’ worth of funds to cover your business expenses when profit margins are in the red.

3. Continue Your Marketing Efforts

An effective way to weather a recession is to continue investing in your business with marketing. Keep providing value to your customers and build relationships with your audience. Evaluate and invest in the marketing efforts that offer you a high ROI. This could be email newsletters, social media campaigns or paid ads.

light bulbs showing facets of marketing

It’s also important to invest in lead generation so you don’t miss an opportunity for revenue growth. Ask existing clients for referrals, attend networking events, and create a process for cold calling or cold emailing. By putting effort into growing your business, you’ll be able to bounce back faster if a recession hits.

One key thing when preparing your marketing plan is to know how consumers think and behave during a recession. Their spending becomes prioritized in four typical categories:

  • Essentials: The items they require to cover basic needs and survival
  • Treats: Indulgent purchases that make them feel good
  • Postponables: Desired items that can be delayed for an indefinite amount of time
  • Expendables: Nonessential, unnecessary purchases

During economic hardship, consumers meticulously evaluate where their money goes. Knowing where your business falls in the minds of consumers will help you plan an effective marketing strategy. Overall, invest in your loyal customers who offer unwavering cash flow and the most opportunity for organic growth.

4. Learn About Financing & Small Business Relief Options

During a recession, small businesses may need to seek financial assistance. Exploring small business loans when your revenues are strong increases your chances of obtaining the capital you need. It’s far more challenging to apply during a recession, so it’s worth checking out ahead of time. 

file folders with tabs for funding and grants

You can use small business financing to purchase inventory, upgrade your technology and operations processes, bridge your payroll and more. It might be the backup plan you need to keep your business going until your profits increase.

Also, seek out small business relief options. During the pandemic recession, the US Department of Treasury offered tax credit, paycheck protection and capital investment programs for small businesses. Keep an eye out for these types of assistance programs in the face of a possible recession.

Your state or local community may also offer small business grants or support. You can even seek out funding options from large corporations that offer small business sponsorships or grants. Keep a list of resources so you know what’s available to you and incorporate it into your recession strategy.

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