Here’s How to Anticipate a Recession as a Small Business Owner

Many experts anticipate that a recession will be coming in the next several years. This is a problem for everyone of course, but it is particularly difficult for small businesses.

Business owners who are doing well during regular times may find that their cash flow cannot adapt adequately to the pressures of a recession. While you can’t insolate yourself entirely from a poor financial climate you can prepare yourself. By thinking proactively, you will be uniquely positioned to survive, and possibly even thrive in a recession. In this article, we take a look at several things small business owners can do now to prepare for the future.

Cashflow

During ordinary times, healthy businesses don’t have to think about their cash flow much to stay open. Their expenses, and what they are owed can take a place on the back burner as they conduct their day-to-day operations. Why?

Surveys indicate that the majority of small businesses have approximately one month of cash in reserve. In other words, should emergency circumstances arise, they can keep the lights on for an entire month without any friction.

But what if you have six months of low numbers? The reserve starts to dip. Vulnerabilities creep in. Businesses can prepare for a recession by monitoring their cash flow closely. Keep an eye on what you owe, and what you are owed.

Taking a hard look at receivables is a good way to increase your cash flow. Otherwise, the money you are owed can fall into the dreaded category of Revenue Leakage—the approximately 5% of annual earnings that gets needlessly lost.

Maryville University professor Jaime Peters says, “Make sure you have your financial house in order.  This means having a balanced budget, an emergency fund of 3-6 months of expenses, and hopefully some investments for the future.  This potential recession is likely to be a bit harder on people than 2009’s or the dot.com bubble bursting recessions – this one may come with high inflation, which can deplete savings at a much faster rate.”

Cashflow awareness also gives you a chance to consider what expenses could potentially be reduced. During times of recession, paring down expenses can help you stay operational for as long as possible.

Get Creative

When Covid-19  first hit it was incredibly difficult for businesses everywhere. Many did not manage to weather the storm. Those that did largely did so thanks to their creativity. Customers did not want to go inside businesses. In many places, they legally weren’t even allowed to. Small businesses catered to this need by revamping their curbside services.

They also took a close look at consumer needs. There were product shortages. Could these high demands somehow be met? What about PPE?

Diners could no longer go inside restaurants. Could businesses provide resources that did more to replicate the in-person dining experience?

These considerations, of course, are no longer necessary to make. But ordinary recessions do produce their own set of circumstances that should be considered and catered to. Your customers may be on a pared-down budget. Can you emphasize products or services that are tailored to people with limited resources?

Or perhaps you can try specific product lines to meet whatever current demands are in your local marketplace. Being fast on your feet is a key element of surviving recessions.

Consider Your Financing Options

Surviving a recession may also involve taking a hard look at your financing options. The goal, of course, is not to accumulate significant debt that will follow you even after the recession has ended. Loans are one option to take, but not the only one.

Do you own the building that your business operates out of? If so, consider using equity as a way of handling expenses. Homeowners can also tap into their home equity through a HELOC. Home equity lines of credit are a relatively low-interest way to tap into the money you’ve already put into your home.

Borrowing of any kind should be done with caution. Look for ways you can find low-interest financing for your business.

Grants

Grants were a significant source of relief during the early stages of the pandemic. Companies like Facebook provided small but helpful amounts of money to struggling businesses. There are also grants that might provide payment relief and other resources that can help you stave off the damage of the recession.

Resources may not be as readily available as they were at the height of the pandemic. However, options may emerge as financial conditions across the planet tighten. Get in early. Understand how to appeal to grant communities, and keep an eye out for opportunities. Grants are usually offered in a limited capacity.