Small Business Guide to Getting Through a Recession

If you own a small business, you know it takes a lot of time and work to succeed. In the beginning, you give up nights and weekends to build your brand and solidify the foundation of your company. However, you may be concerned about your business strategy during a recession. These are a few ways you can prepare for tough times.

What Should a Small Company Do During a Recession?

Although most businesses follow the cyclical trends of the economy, small businesses tend to get hit the hardest during economic downturns. Therefore, you must proactively prepare your company for these widespread, significant contraction periods. Often, these periods of recession last at least six months, so small business strategies need to be multipronged.

Evaluate Your Finances

Your first task should be to evaluate your finances. First, learn about and manage your cash flow. Your cash flow describes when you receive and spend money in your business. During difficult times, when cash is preferred, you may experience restrictions on the inflow of money.

Recessions require tightening your budget and reviewing your cash flows daily. You should also use your cash flow statement to conservatively forecast future cash flows, which can help you anticipate shortages.

Address your costs. Take time before and at the beginning of contraction periods to eliminate unnecessary expenses and reduce your necessary costs as much as possible. Speak with your suppliers and negotiate your input costs. Build lean inventory systems and more efficient processes.

You should also manage your debt financing. Avoid paying off debts through significant lump sums because this can significantly restrict your cash flow, which you may need for other expenses, causing future financial challenges. Instead, review your interest rates and consider renegotiating or replacing high-interest loans with new, lower-interest financing.

In addition, pay off high-rate loans first. During lean times, your lines of credit can increase your available cash. However, calculate the debt’s cost to determine its future impact on your finances.

Review your revenue streams, and focus your company on those that are the strongest and can bring you through tough financial times.

Connect With Customers

To experience the most negligible impact during a small business recession, develop strategies that increase customer loyalty. Regularly connecting with your customers can significantly impact your revenues. Your regular clients understand your business and its reputation. They are part of your community, and you can lean on them during tough times.

Your customer service needs to be exceptional during contraction periods. These individuals also feel the stain, so be open about price increases. Increase your flexibility concerning return policies. Pursue open, compassionate communication.

Not only should you ask for their feedback and offer new products, but you should also pursue your receivables. During contractions, your customers may start slowing or lowering their payments. Although no one wants to spend money in a recession, this money is owed to you, and you need to collect it.

You can help your customers and increase their loyalty by being willing to work with them. Evaluate their payment histories and talk to them about what they need. Then, offer to renegotiate their contracts.

The goal is to reduce your outstanding receivables and provide alternative payment methods, including electronic payments. If clients don’t pay their bills on time, do not extend additional credit to them. You may even restrict all credit during these periods.

Stay Updated on Government Relief

During recessions, the government may set up disaster relief help. For example, the Small Business Administration may offer low-interest loans. Congress may also pass business relief loans and grants that can help during tough times. Also, look into local resources that can help you pay salaries or rent. In addition, some companies and states may offer grants.

Do your homework on these relief opportunities. Make sure you understand their current and future costs.

Formulate a Plan

As you ask what to do in a recession, you can begin to formulate a plan based on data. Build a strategic plan and make decisions using financial and market trends, forecasts, and your company’s finances. Review economic forecasts, and build business plans for any outcome you foresee. You should have set aside cash during your business’s growth periods, so develop strategies to use this excess cash to benefit your company.

You should also review your company’s organizational structure and look for ways you can use it to adapt. Also, analyze your operating costs. Are there any you can reduce? For example, do you need your full warehouse or office space, or can you lease part of this out to another company? Look for creative ways to reduce these costs.

Although no business wants to lay off employees, you may not have a choice, so evaluate each employee and their contribution to the company. If you have to reduce your costs and have exhausted every other method, you can strategically reduce your workforce.

Get Creative

Although you should be investigating new revenue streams consistently, it is imperative to diversify your revenue during contraction periods. Find the latest product lines or services you can offer your current clients and those that may attract new ones.

Increase your marketing efforts. This doesn’t always mean you need to increase your marketing budget. Instead, search for economical ways to promote your business and products. Stay visible, so customers don’t have to search for you. Meet them where they are.

Understand that your customers likely do more in-depth research and analysis on the things they spend money on in tough times. Be prepared to fight for their dollars. Never lie to your clients to get a sale. Instead, find ways to build trust and show them how your products and services will benefit them even during hard times.

Be flexible, innovative, and willing to pivot. Look for new, recession-proof products, and consider rebranding strategies.

As you prepare your company for a recession, remember to remain calm. Focus on what is going right and tackle the other challenges one at a time.