Business Management / Finance

How to prepare your small business to survive the next recession

Philip PIletic

Updated: Sep 12, 2019 · 6 min read

Toolkit for download in this article

small business recession preparations

Everywhere you turn today, you'll likely be confronted by some worrisome economic news. The U.S. bond yield curve has inverted. The ongoing trade war with China, and others, shows no signs of resolution. Even the major European economies already are slipping into recessions. For big businesses, these are unmistakable signs that it's time to scale back operations and prepare for bottom-line pain.

For most small businesses, however, these broad economic indicators seem to be producing plenty of concern – but very little in the way of strategic planning. That's a troubling trend because more than 1.8 million small businesses closed their doors in just the first two years of the last recession. Scores more suffered economic damage from which many have barely recovered.

With another recession looming, small businesses have to do a much better job of planning ahead this time around if they want to stay viable. The steps they have to take could be painful in the short term. They may not be easy to effectuate. They will, however, protect the business from faltering in the economic storm to come. To help small businesses get ready, here are four essential steps to prepare for the next recession and some real-world insight from business leaders who've been through downturns before.

Focus on efficiency

One of the things that every small business must do to survive a recession is to prepare to do more with less. That means finding ways to increase efficiency in everyday operations. The good news is that there always are plenty of ways to accomplish that goal, and they're not very difficult or costly to implement.

First, have employees brush up on time management skills. Doing so will prepare the whole team to operate on tight, unforgiving schedules. Second, examine existing workflows to look for opportunities for automation. Today, platforms such as Zapier make it possible to construct automated workflows using the tools small businesses use most, like Gmail, Dropbox, WordPress and hundreds more. By removing routine repetitive tasks from the equation, existing employees will have more time for additional business-critical work.

Stabilize finances

When business is booming, it's very easy to fall into poor cash-flow management habits. After all, when there's plenty of cash to go around, you don't always notice where it's all going. When a recession sets in these habits can turn fatal for a small business. That's one thing that crippled businesses in the last recession. By the time they realized they needed financing to get through the downturn, lenders had all but stopped the flow of cash to protect their own interests.

Before that can happen again, small businesses should take stock of their current financial picture. A complete review including revisions to cash-flow projections is in order (taking a potential downturn into account). If there appears to be an anticipated need for financing, now's the time to get it – while interest rates are low and your business's bottom line is still healthy.

Depending on the size and complexity of the business, choose a financing option that can provide a cushion to keep the doors open. Term loans and business lines of credit are popular choices for many small businesses. If necessary, consider a personal loan for business use with a lengthy repayment schedule. That will help keep the business flush with cash without creating an unsustainable debt load in the event of a downturn.

It's also a good idea to deal with any outstanding tax liabilities now, before revenue shortfalls make the situation worse. During the last recession, the Internal Revenue Service responded to an increasing tax gap with stepped-up enforcement efforts. According to Amir Boroumand, CEO of Tax Defense Partners, "By the time many businesses realized that the last recession had brought the IRS to their doorstep, they had no leverage to make a deal. Right now, while the IRS isn't facing a mandate to increase collections, they're more likely to extend favorable terms to businesses that require time to pay what they owe." It's a lesson that too many businesses learned too late last time around, and it cost many of them dearly.

Diversify product lines

One of the takeaways from the last recession is that not all products are created equal. Once consumers start to feel the pinch, they will curtail spending in a variety of areas until economic conditions improve. Last time around, brands such as Arm & Hammer and Coleman saw double-digit sales growth while pricier options declined. For small businesses, there's a lesson there.

The lesson is that now is the time to diversify product lines to include options at multiple price points. Examine the latest retail trends to see what kinds of items are in demand, and expand into those areas wherever possible. Make sure to focus on items that are necessities rather than luxuries. If your business is within the leisure or entertainment industries, create low-cost options that will be ready to roll at the first sign of economic trouble.

That's the approach favored by Armen Yemenidjian, the founder and CEO of Essence, a Nevada-based cannabis dispensary. He says: "Since we've moved into the recreational side of the cannabis industry, we face increased bottom-line risk in the event of a recession. That's why we're investing now in our facilities to create a better customer experience and lower our product costs. In the short term, it's an expensive proposition, but in the long run, it will help us to create a robust and recession-proof revenue stream with room in our margins to work with."

Go big on marketing

Although it may seem obvious, the best way for a small business to survive a recession is to have as large a customer base as possible. Making that happen requires money, so the time to do it is before a recession hits. That means you must plan to increase marketing spending now to grow sales in advance of a downturn.

The U.S. Small Business Administration advises small businesses to spend between 7% and 8% of gross revenue on marketing. That figure, however, isn't enough when there are economic headwinds coming. As a general rule, consider increasing marketing spending into the 10% to 12% range, or higher, if you're in a crowded market. In such cases, it pays to invest as much of your revenue on marketing as the business can sustain. The expenditures more than pay for themselves when used wisely.

Use the additional funds you allocate to invest in local and hyper-local marketing campaigns, which tend to have the greatest ROI. Reserve some funding to increase spending on customer loyalty programs, which will increase retention and reduce customer churn. Also, build a solid marketing resume collection – because when your business depends on the strength of your marketing efforts, you'll need to bring in some high-end talent to make sure your additional investments don't go to waste.

Emerge stronger than ever

Although planning for a recession is never a pleasant exercise, it is a necessary effort for any small business. That's especially true now, as the economic storm clouds continue to gather. The good news, though, is that doing the work now should see your business through whatever lies ahead in good stead. That means your business should make it through any upcoming recession and emerge in lean, efficient shape, and ready to jump right back into a growth phase.

In fact, it's a good idea to keep many of these preparatory steps in mind even when the economy is booming. They create the kind of operation that can beat the competition and dominate whatever market your business is in. Plus, remaining vigilant keeps your business resilient no matter what turbulence comes. Remember, not all economic slowdowns provide advance warning of their arrival – and getting caught flat-footed can doom a small business to failure, so act now and don't leave your business's fate to chance.

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