How to Successfully Deal with a Recession

The ongoing economic uncertainty has had many businesses thinking about how to weather challenging times.

There are ominous signs, including warnings of a forthcoming recession, rising commodity prices, supply chain challenges, and rising interest rates. Business leaders are working hard to determine which moves need to be made now to be successful during an economic downturn.

The good news is that these down economic times are not new; they’ve been a factor cyclically for decades. Yet today, given the additional complications of ongoing health fears from the COVID-19 pandemic, labor shortages, and political polarization, there is even more that business owners need to grapple with to remain successful.

If you have not yet started a business but you’re thinking of doing so, it’s a good time to pause and ask yourself if now is a good time to start a business? Will you have the capital, and will your desired markets be able to support the business if a recession strikes? Asking these questions can help you determine if now is the right time to launch. And if so, the advice contained below can help ensure your business excels.

Fortunately, there are many proactive steps that small-business owners can take now to ensure that their business is recession-proof. While not all these steps may apply to your small business, they can help inform the decisions you make to keep your company protected and thriving during challenging times.

1. Secure Financing

The need for financing from a bank or other financial institution is an important consideration, no matter how mature or profitable a business is. The need for working capital and lines of credit can help weather the storm a recession can cause. If your business has the profits and balance sheet to qualify, it may make sense to obtain financing now, even if you don’t need it. Securing financing during a recession can be more challenging.

2. Control Your Cash Flow

Do you have a good handle on how much money you’re spending versus how much you’re bringing in via revenue? These cash flow analyses are important to consider heading into a recession.

Knowing your pressure points with cash helps you create a plan that results in a profitable future. You can also create “levers” you know you can raise or lower as needed depending on the economic realities.

Good cash flow management includes following up on past-due invoices from clients, creating contracts that include late fees for missed payments, and asking for deposits, especially on high-paying jobs.

One thing to consider when examining your balance sheet is your expenses. Tightening up your expenses can help you stay in the black when times get tough. And if you make the cuts now instead of when things are more difficult, the sting may be less severe.

3. Evaluate Employee Needs

While it’s never easy to think about reducing your headcount, in challenging times, it may become necessary. Are your employees doing their jobs well and contributing to the bottom line? Make adjustments to ensure that you have the right people in the right roles. Employee strategies should also include investing in retraining or cross-functional skill-building to ensure that all your bases are covered. If you need to reduce your staff or a person leaves the organization, cross-trained staff can help make up the difference without losing much productivity.

Looking at your employee talent is a two-sided assessment. In addition to determining if staff reductions are necessary, now is the time to consider retention strategies, especially for your top talent. The loss of a key contributor in a recession can be a difficult blow to absorb.

4. Diversify Your Revenue Streams

An overreliance on one source of revenue can become problematic in a recession. You want to be bringing in revenue from multiple streams, whether it be lines of products or services, markets, or even customers.

Now is the time to be creative and consider using new tactics to diversify your revenue. That may mean adding digital or physical products or using affiliate marketing programs. You may want to create monthly or recurring revenue options that provide a steadier stream of income.

The key is not to have all your eggs in the same revenue basket. If that basket goes away, it can be difficult to pivot. Having multiple baskets available in a recession can reduce the pressure and impact of any one revenue source.

5. Create a Rainy-Day Fund

Just as we create emergency funds for those unexpected expenses in our personal lives, we can use a rainy-day fund at our business. Having some cash in reserve that is not committed to a specific project or expense can give us a cushion if belts need to be tightened.

Your rainy-day fund can grow over time, too. When there is a need to tap into the fund, it’s important to replenish it as soon as you are able. The reserves can act as a major lifeline when needed.

6. Have an Exit Strategy

Some business owners envision having a stake in their companies in perpetuity. Others plan to pass the business on to their children or other family members.

A different mindset is to build your business with the idea that you will eventually sell it. While you may choose not to sell, having that perspective will lead to a different kind of decision-making.

A sell-centric approach will mean taking a look at how the business operates, the people or causes it serves, and your role in it. It means investing in systems, technologies, and processes that maximize profits. Take a step back and evaluate the key drivers and decisions you’d make if you were planning to sell, whether in a recession or not.

7. Focus on Your Clients

Client relationships can make or break your small business, especially if it’s a service-oriented company. Just as your business is assessing what is of the most value, so, too, are your clients. That’s why it’s so important to invest in your clients and their success.

Create the best possible results for those clients, and they’ll understand the value you offer to them. They are more likely to keep turning to you for new business and may even expand their relationship with you. Happy clients also are ideal ambassadors, spreading the word to others in your industry about the value you provide and the benefits of working with your company.

8. Invest in Technologies

Technological innovation is driving change across nearly every industry. New, dynamic tools such as artificial intelligence, the Internet of Things, virtual and augmented reality, and quantum computing are transformational. Consider what tools would have a short return on investment and help your company gain efficiency and profitability, and invest accordingly.

9. Reduce Inventory

Inventory costs can be considerable, given the warehousing, management, sourcing, transportation, and shipping expenses. Reducing your inventory can lower your operating costs. It can also prevent you from dealing with slow-moving inventory during a recession.

There’s always a balance when it comes to inventory – having enough on hand to fulfill orders quickly and converting inventory to cash are both important considerations. Look to downsize less-popular items and those that are easily replaced at the same time. You evaluate the supply chain and what pressure your suppliers may face during an economic downturn.

A recession need not be a time for doom and gloom, especially if you have taken proactive steps to address pain points. By taking a hard look at your company, its operations, people, its expenses, and financials, you’ll be well-positioned should a recession occur.

At each step, remember that the interests of the company must be paramount. You’ll find that decisions, while difficult, will be evident. The choices you make today will mean fewer, less severe challenges in the future.

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