Business Strategy

How to Better Prepare Your Small Business Should a Recession Hit

February 23, 2023 — It’s one of the topmost concerns surrounding the state of the economy now as economists speculate the potentially devastating consequences of rising gas prices and record inflation rates. Coupled with a slowdown in consumer spending, alarmed small business owners are taking precautions – instilling their own cutbacks and price hikes in preparation.

So, are we headed for another recession?

According to a recent survey from The Financial Times, more than two-thirds of academic economists polled predicted a recession to hit next year. Meanwhile, one in four finance chiefs believe that there is a significant risk of a downturn as economic prospects plummet to their lowest level in nearly a dozen years, according to the second-quarter Economic Outlook Survey released by the Association of International Certified Professional Accountants.

Shoring Up Your Business Defenses

While we can’t say with absolute certainty whether or when a recession occurs, it’s important to note that part of running a business is experiencing its up and down cycles. That said, it makes it even more critical to be prepared for any economic eventuality and increase the chances of survival.

Although some businesses have already implemented cost-cutting measures in response to the ongoing inflation and increased gas prices, more may need to be done. Here are some considerations to add to your strategic plan.

1. Cash Flow Management

Maintaining a steady cash flow is critical for most businesses during a recession. An unexpected price hike from a supplier or vendor or a customer who’s late paying their bills may cause dangerous ripple effects.

Focus on these three areas to create a solid cash flow stream:

  • Accounts receivables: Stay on course with your invoice and bill-reminder schedules. At least temporarily, you may want to weigh the pros and cons of charging a fee or halting payment options.
  • Expense management: Do you include some padding in your budget for unexpected expenses? Such reserves may be helpful so that you avoid seeking outside sources when funding is difficult to obtain. Consider setting up a working line of credit that you can tap into during negative cash flow times.
  • Inventory control: Review the quantity you need to have stocked before reordering. Negotiate with your suppliers to determine restocking timeframes that make sense to your needs. You may want to secure a backup supplier, just in case.

2. Increase Profits by Optimizing Your Best Asset

As a small business, you may have the advantage of meeting the demands of your community that larger corporations are unable or unwilling to meet. Despite limited resources and budgets, you can monitor market trends and quickly shift strategies to respond to these needs.

Look for areas you can use your biggest asset – service – to increase your profits. Some studies show that consumers don’t mind paying more for better service, which is critical, especially during a downturn when you have to raise prices. Refrain from limiting your marketing efforts. Instead, emphasize your service offerings, such as free delivery or loyalty programs.

3. Maintain the Right Staffing Levels

With the ongoing labor and hiring challenges, it’s more important than ever to ensure you’re managing your staffing operations, including costs. Look for employees with the skills needed that require minimal training and supervision.

Consider how and when you’ll need to add more staff on the payroll and whether a contract employee makes more sense financially.

A Light at the End of the Tunnel

Hoping to head off an out-and-out recession, the Federal Reserve is trying to reverse rising inflation rates through various strategic moves to glide into a “soft landing.” According to Investopedia, a “soft landing” refers to a cyclical economic slowdown that sidesteps a recession. It happens through the central bank, which delicately balances increasing interest rates without leading to high inflation and causing a severe recession.

Whether a recession is imminent is not what is at stake. The key is to use whatever tools you have at hand to position your small businesses in the best light so when a downturn does happen, you’re prepared to navigate your operations through the storm. If you need more ideas, look at SCORE’s five tips on keeping your small business operational during a crisis.

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