An economic recession is a challenging time for businesses. When it occurs, it means unemployment is rising, spending is decreasing, and businesses may struggle to survive amid all the uncertainty.
The good news is that there are ways to recession-proof your business ahead of an economic downturn. Conducting strategic planning, nurturing customer relationships, and building cash reserves are just a few ways to help your company remain resilient during challenging times. Here is more on how to prepare your business for a recession.
Key Points
• Building cash reserves to cover three to six months of expenses ensures financial stability during a recession.
• Managing and restructuring debt can improve credit and simplify repayment, thereby enhancing financial flexibility.
• Cutting costs and streamlining operations helps maintain profitability during economic downturns.
• Diversifying revenue streams reduces reliance on a single income source, adapts to changing consumer demands.
• Focusing on customer relationships through engagement and feedback retains loyalty and attracts new clients.
Historical Recession Patterns and Warning Signs
Although recessions can be difficult for everyone, they are a normal part of the economic life cycle. The U.S. has had 34 recessions since 1857, the most recent of which spanned two months in 2020 during the Covid-19 pandemic. Recessions occur when the economy contracts and can be marked by higher unemployment, lower spending, and a decline in industrial production.
Sometimes a recession is defined as two quarters in a row of declining gross domestic product (GDP). GDP is a measure of all the goods and services that the economy produces. The National Bureau of Economic Research (NBER) is responsible for officially declaring a recession. It looks at multiple indicators, including the GDP, retail sales, payroll employment, and personal income.
Some other signals that economists track when predicting a recession are inflation, stock market declines, and a reduction in housing prices. Investors also tend to put more money into gold ahead of an economic downturn, and business spending often starts to go down.
Industry-Specific Recession Vulnerabilities
Some industries are more vulnerable to recessions than others. The retail and hospitality sectors, for example, often feel the pinch first when consumers cut down on discretionary spending. Clothing stores, luxury brands, hotels, and restaurants may lose revenue as people cut back on non-essentials.
Manufacturing companies can also get hit hard due to a decline in consumer demand and a slowing of global supply chains. Both the residential and commercial real estate markets can struggle as home values decline and businesses downsize or shut down locations.
Financial Strategies
Don’t wait until a recession strikes to protect your business. Here are some financial strategies you can use ahead of time to prepare for an economic downturn.
Building Cash Reserves and Emergency Funds
Building an emergency fund can help your business survive during a recession. Ideally, you could save enough cash to cover three to six months’ worth of business expenses. That way, you’ll be able to pay employees and cover other costs if your business slows down temporarily.
When cash flow is strong, focus on building up your cash reserves. An alternative option is opening a business line of credit, which you can draw from as needed. You’ll only pay back the amount you borrow, but you will also have to cover interest charges and any associated fees.
Managing and Restructuring Business Debt
If you owe a business loan or other type of debt, make payments on time to protect and build your credit score. Paying your small business loans and other debts on time will help you build a positive relationship with your creditors. As a result, they may be more likely to renegotiate terms if a business recession hits and you need a new repayment schedule. You might also apply to refinance your startup business loans or other debts if interest rates are low. Refinancing has the potential to save you money and simplify repayment by combining multiple loans into one.
Operational Adjustments
By reviewing your operations, you might find areas where you can cut costs. Evaluate your equipment, facilities, services, staff, and other components of your business to see if you have any areas of waste.
You could negotiate with vendors to reduce costs or switch to a new software that streamlines your invoicing process. Cutting costs could help you through an economic downturn, as long as it doesn’t harm the quality of your services or the satisfaction of your customers.
Diversifying Revenue Streams
Diversifying your business’s revenue streams is another important part of recession planning. You might put more focus on research and development so your company offers a greater variety of products and services, rather than putting all its eggs in one basket.
Economic recessions can create unique opportunities for companies as consumer habits change. During the Great Recession amid the pandemic, for instance, remote work platforms and delivery service-based companies thrived.
Customer Focus
Nurturing your existing customer base is also key for surviving a recession. Not only will you maintain loyalty from your current clients, but they might also attract other customers to your business via referrals, positive reviews, and word-of-mouth.
You could engage with customers through social media or email to stay present in their minds. Make it easy for them to reach you through email, phone, or a social media channel.
Collect feedback whenever possible so you can improve your offerings and best meet customer needs. On the back-end, record details of customers’ purchase history so you can make customized product recommendations and upsells.
Government Resources
During an economic downturn, you may look to the federal or state governments for financial assistance. The Small Business Administration funds various types of business loans. It also offers low-interest disaster loans to businesses impacted by natural disasters.
The State Small Business Credit Initiative (SSBCI) provides capital and technical assistance to small businesses across the U.S. Some states also provide support to local business owners. The Massachusetts Growth Capital Corporation (MGCC) for example, has loan and grant programs to help small businesses grow.
During economic downturns, the government may introduce temporary relief programs. During the Covid-19 pandemic, for instance, the government helped small businesses with the Paycheck Protection Program (PPP) and Employee Retention Credit (ERC).
Planning for Recovery
Recessions don’t last forever, so it’s important to create a recovery plan for your business. Set short- and long-term goals that make sense for your company when the recession ends.
Continue to evaluate your finances, cutting wasteful expenses whenever possible. Maintain strong relationships with your customers, and consider whether the recession has caused customer behavior to change.
If so, you may need to adjust your product offerings, pricing, or business model to adapt to a changed market.
The Takeaway
It’s impossible to predict whether a recession is on its way or how long it will last, but planning for one can fortify your business for tough times. Focus on optimizing certain areas, such as customer satisfaction, marketing, and pricing. Look for areas where you can cut costs without sacrificing quality, and consider refinancing debt for better rates or more manageable repayment terms. By having a strategy in place, you can position your business to survive, or even thrive, during an economic downturn.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
How much cash reserve should my business maintain for a recession?
It can be beneficial to build a cash reserve that would cover three to six months of operating costs to help your business survive a recession.
Should I reduce prices during a recession to maintain sales?
Reducing prices during a recession may help maintain sales, since consumers are probably not spending as much. At the same time, be careful not to devalue your company’s services or products. Factors such as consumer demand and what your competition is doing may also help you tailor your prices during a recession.
What government programs help small businesses during economic downturns?
The Small Business Administration offers business loans and other resources to help small businesses during economic downturns. Some states also offer financial assistance.
How can I retain employees while cutting costs?
If you need to cut costs while retaining employees, start by taking stock of all your business expenses. Figure out how much you’re spending in areas like rent, utilities, inventory, marketing, insurance, and loan payments. Identify areas where you can reduce expenses without having to downsize your staff. Boosting engagement or offering better benefits are also ways to retain employees during challenging times.
Is it better to take on debt or reduce existing debt during a recession?
There’s no one-size-fits-all answer when it comes to debt during a recession. A business may benefit from taking on debt if it needs to increase cash flow, can qualify for a low interest rate, and has a solid repayment plan. On the other hand, reducing debt may be the better option if the company’s revenue is uncertain. Balancing risk with return is key when determining how to manage debt during a recession.
Photo Credit: iStock/Liubomyr Vorona
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