6 Ways To Recession-Proof Your Small Business
If you’re among the small business owners concerned about a recession on the horizon, you’re smart to be alert to what an economic slowdown might mean for your company.
The good news is the trending discussion about the predicted downturn is producing advice from experts and entrepreneurs on what small businesses can do to prepare for a recession. Here are a few tips on how to plan for and survive a market slump.
Build Cash Reserve
Financial advisors always recommend small businesses have a cash emergency fund for operating expenses, regardless of the state of economy. But having access to liquid capital is even more important during a recession because consumers and lenders become more cautious with their money.
“If credit market conditions deteriorate and the supply of bank credit dries up, the cost of external financing rises—especially for small firms, which would face difficulty raising funds for regular operations or new investments,” according to the Federal Reserve Bank of New York in an article reviewing the 2007-09 downturn and published in its Current Issues in Economics and Finance.
Shark Tank star and FUBU founder Daymond John recommends keeping enough cash on hand to cover at least three to six months of operating expenses to prepare for a recession.
In an article by Michael Parrish DuDell posted on CNBC.com, John says it’s imperative that small businesses assess their spending with discipline and humility.
“I know from experience that once a business reaches a certain level of success, it can begin to throw money at every problem that comes its way,” he says, according to the post. “When the economy slows and sales start to decline, it forces leadership to get honest about their cash flow and find creative ways to offset high costs.”
Up Your Production
Increasing and speeding up cash inflows can also help you survive a recession, successful entrepreneurs say, and stepping up production is one way to do this.
Think of it like preparing for vacation (only not as happily), you know the way you have to work harder before you leave to avoid being so far behind when you return. The tactic is similar, though it’s for a longer term, in that producing more now will better prepare your business for what’s to come.
“Get your team to be more productive than they’ve ever been,” writes Gregory Go in a Trends and Insights article posted on the American Express website.
Collaborate with Partners
Even when capital is sparse – such as a tightening economy – you can’t afford to stop competing, so successful entrepreneurs recommend developing other forms of currency.
One way small businesses can do this is through forging partnerships with other businesses or community organizations to help build your brand awareness (as well as the partner’s).
John said he turned to partnerships in his early days as an entrepreneur when FUBU lacked the resources to compete with major brands. That commitment to community partnerships proved invaluable to his long-term business success too.
“Building mutually beneficial relationships has been an essential part of my life as an entrepreneur and investor,” says John in the CNBC article.
“Whether you’re cross-promoting, trading services or just sharing best practices, tapping into your network to create win-win opportunities is a powerful and inexpensive way to gain major traction, especially in difficult economic times.”
Reduce cash outflow
This ends up being a natural reaction to a recession. But financial experts say it’s a good idea for small businesses to identify ways to reduce or eliminate expenses before the economy takes a turn.
Take a look at your discretionary spending and identify what can be cut. Examples include newspaper and magazine subscriptions or other “perks” you can eliminate as you prepare for harder economic times.
Pay payables later.
Another tactic you can use to keep cash in hand longer is to find ways to pay later – call your vendors and see if you can get better terms.
“For example, you may be able to get 45-day terms instead of 30-day terms,” Go writes in the American Express post. “Having cash on hand for an extra 15 days may be crucial in your survival.”
Tap Newly Created Talent Pool
There are some small businesses, particularly if you’re not in a sector typically hit hard by a recession, such as construction or manufacturing, that can find opportunities for new talent. This is due to a new labor pool created from layoffs at bigger companies.
If you’re able to hire someone, a downturn could be the best time to find a new employee to bring new or specific skills – people who otherwise wouldn’t be accessible to small businesses.
Or you might be able to take advantage of contractors and freelancers who are more available for your shorter term projects.