July 19, 2022
A Small Business Owner's Survival Guide to Economic Decline
What You’ll Learn:
- What a recession is and how it could impact your business
- Ways to prepare your business for an economic downturn
- Why taking steps to protect your cash flow could pay off later
If you’re a small business owner, you might be worried about the economy right now. Inflation is on the rise, meaning the prices of goods and services are going up and the spending power of the dollar is weaker. Interest rates are also spiking, making it more expensive for businesses and consumers to borrow money. At the very least, experts expect the economy to slow down, while many predict that another recession is inevitable.
How should small business owners be preparing for the months ahead? This guide will give you all the insights you need to prepare your business for a recession without packing on any unnecessary stress.
What is a recession?
A recession is characterized by a significant and prolonged drop in economic activity. During a recession, business sales will typically be trending downward, overall production levels in the economy will fall, and unemployment rates may increase. As scary as a recession can be, these periods are considered a natural part of the economic cycle and there are steps businesses can take to survive the lean times.
How does a recession impact small businesses?
Small businesses drive almost half of the total economic activity in America. They’re a source of constant innovation, creativity, and healthy competition in the marketplace. But many of these companies operate with cash flow constraints, limited emergency funds, and at least some amount of debt—factors that can create extra vulnerability during unfavorable economic conditions if you aren’t prepared with a plan.
A slower economy typically means consumers are spending fewer dollars. On top of that reduced spending, higher interest rates are making it more difficult to borrow money and pay back what you already owe. Anticipating these trends can help small businesses take early action to improve their overall financial health in times of scarcity or uncertainty in the economy. Here are some practical strategies to brace your business for an economic downturn.
What can you do to prepare?
- Adjust your business budget. In the most basic sense, a budget is a planning document—it helps you determine the best financial strategy for meeting your current and upcoming business goals. If unfavorable market conditions are on the horizon, it’s fair to think your goals might change—say, from a growth mindset to an endurance mindset. You might want to consider adjusting your overall budget to meet the moment. For example, since recessions often lead to reduced consumer spending across the board you can start by doing some research on your industry to understand how this shift in behavior could impact your customer base. From there, you can adjust the revenue predictions on your budget and see the impact it may have on other areas of your business.
- Limit unnecessary spending. Take a good look at where your money is going and determine the best places to trim down on spending. If possible, consider negotiating recurring costs like vendor agreements, rental agreements, and platform subscriptions to make the most significant impact. If payment terms on your contracts are immediate, consider switching to net 30, or even net 60, to give your business a cushion. Once you whittle down on your operational expenses, you can also look for opportunities to develop and diversify additional revenue sources to further fortify your business.
- Invest in cost-effective automation. After you’ve taken an initial pass at eliminating unnecessary dollars, look to where your business can improve efficiency on the money it has to spend to survive.
- Stay diligent about receivables. Getting paid is always important, but during economic downturns, small businesses will rely more heavily on collecting payments. Slow payments can really jeopardize cash flow, particularly for small businesses that may have fewer clients. Being able to accurately predict when you’ll get paid helps you manage your own operational costs and pay back debts to vendors/suppliers on time. Stay on top of any outstanding invoices—when it comes to late payments, forewarned is forearmed. Adding late payment fees to your invoices can help incentivize on-time payments. You can also leverage outstanding invoices with Hopscotch Flow.
- Avoid taking on more debt. Many small businesses take on some form of debt to get up and running. You might be planning to use new lines of debt to invest in growth: launch new products, expand to new markets, etc. Challenging economic conditions might mean those plans should take a backseat for now. If incoming revenue takes a hit, you may wind up with fewer resources to pay off outstanding debt. Paying down debt when times are good can help your business keep more cash on hand each month, giving you greater financial flexibility during slow periods.
- Build an emergency fund. Having cash on hand can help your business weather changes in consumer spending habits. Cash creates flexibility. A reserve fund can help small businesses stay afloat (keep the lights on, meet payroll, etc.) through unexpected or uncontrollable profit dips. How much do you need in that emergency account? It depends on the size of your business and your typical operational costs, but being able to survive for a month or two is probably a good starting point.
Hopscotch Habit: Regularly review expenses to avoid overspending. A clear, streamlined ledger will show you exactly what’s coming in and going out.
How long do recessions last?
There are tons of factors contributing to the current economic landscape. Labor shortages have driven wages up, which in turn has driven the cost of goods up; supply chain issues have made it more expensive to manufacture certain products; global events have even played a role, influencing things like gas prices; and the government recently raised interest rates in an effort to curb spending and fight inflation.
In the middle of all this, we see small businesses working hard to keep revenue coming in the door. Although economic recessions are natural, they can present additional challenges to small businesses and disrupt growth. It may be better to prepare now rather than wait and get caught without a plan if a recession arrives.