Recession is a word that nobody likes to hear, especially business owners. Recessions can severely reduce consumer spending power, which means reduced cash flow for your business. But the effects of a recession don’t have to be long-term.
Surviving a recession is all about what business owners do best: thinking on their feet, getting creative, and learning to pivot when necessary. Let’s take a look at these 6 tips on how to prepare your business for a recession:
- Cost Segregation Audit
- Defend Your Cash Flow
- Look for Opportunities
- Examine Your Expenses
- Deepen The Customer Relationship
- Get a Business Loan Before You Need It
What is a Recession?
But before talking about how to prepare for a recession, let’s talk about what exactly a recession is—and why the recession on the horizon is different. One broad definition suggests that a recession is technically defined as two consecutive calendar quarters of negative GDP (gross domestic product).
In less technical terms, that means layoffs, tighter wallets, business closures, foreclosures when laid-off workers can’t pay their mortgage, and a downward spiral of economic and social problems that leave a bad aftertaste for years to follow. Yuck.
Recession Fears For 2023
This coming recession is different because it’s entering a cocktail party of other related socioeconomic challenges. Frustrated consumers have spent the last two years in lockdowns. This not only changed consumer spending habits but severely disrupted the global supply chain.
The federal government printed up and gave away tons of money during this time, which is a contributing factor to the rampant inflation we see today. Fuel supplies have been weakened by geopolitical disturbances and policymaking shifts toward green energy, leading to inflated sticker prices for everything that gets anywhere on a truck (which is pretty much everything). In other words, what we are looking at here is not just a recession, but a recession coupled with inflation and a supply chain crisis.
But don’t let that get your hopes down. Sometimes, a business can thrive during a recession. During the 2008 Recession, companies like Walmart, Dollar Tree, Hasbro, and H&R Block all saw economic growth. There have even been companies that were founded during a recession, like Microsoft, General Electric, General Motors, IBM, HP, and Disney.
However, these fairy tale success stories may not be inspiring enough for business owners. A poll conducted by insurance behemoth Nationwide found that 70% of business owners believe a recession is on the way, but only 37% of them feel prepared to weather the storm.
The fact of the matter is that recessions are cyclical and built into the natural rhythm of a living economy, and any business owner should expect one to occur every 3-4 years. While this current looming recession is certainly coupled with some exacerbating commodities, a little planning ahead can go a long way. Here are a few ways to prepare:
Cost Segregation Audit
Does your business own any property, equipment, or real estate? If you answered yes to any or all three of these questions, a cost segregation audit can be a hidden gem of savings in the form of tax write-offs.
As you may know, a business can claim depreciation of their assets like machinery, equipment, buildings, vehicles, and furniture, ranging from 5 up to 39 years. This tax deduction is meant to help business owners defray the cost of servicing and eventually replacing their assets as they wear down over time.
What most business owners don’t know is that they can actually segregate these costs into different categories, which will allow them to accelerate the depreciation of certain assets. For example, instead of depreciating an entire commercial space over the course of 39 years, a business can segregate the machinery into a different category and depreciate it over the next 5 years, resulting in more tax savings per year.
Defend Your Cash Flow
This might seem odd, especially if you use accounting software and keep your banking information private. But if you do some self-accounting, you might find there are plenty of ways you’re being too nice.
According to a study conducted by U.S. Bancorp, 82% of business failures are attributable to mismanaged cash flow. With a recession looming, it’s time to get strict. Make sure you have payment terms in place that establish late fees and penalties to mitigate the risk of unpaid balances overstaying their welcome.
Collect deposits upfront to reduce the risk of the proverbial dash and dine (even if you’re not in the food business). Figure out a way to politely make those phone calls or send those emails to remind clients and customers that they’re behind on a balance. For recurring charges, consider setting up something like ACH instead of relying on credit cards that can be canceled or have their numbers changed.
Look for Opportunities
The effects of a recession on small business owners are manifold. During the 2008 Great Recession, 1.8 million small businesses closed their doors for good. But one man’s trash is another man’s treasure, as they say…especially when that trash is inventory for liquidation.
A recession can be a great time to get discounts on goods, especially from businesses that are going under. This is one reason why it’s always good for business owners to network and get to know their neighbors. Although it may seem opportunistic to people outside of business ownership, there are plenty of business owners who would appreciate a former competitor helping them liquidate inventory they’d otherwise need to throw away.
And as mentioned earlier, although starting a business during a recession seems counterintuitive, there are plenty of businesses that started under adverse economic conditions. The recent Covid pandemic was an excellent example of this, as it spurred a huge increase in remote living solutions—working, shopping, dating, and even virtual wine tasting (you read that right). Tech companies that rode this wave of enforced or voluntary quarantining found the silver lining in the Covid cloud.
Examine Your Expenses
It’s time for business owners to face the music and see where all the money is going. While you might think that a small business audit cannot possibly result in big savings, think again. Utilities are often a significant expense for businesses. An energy audit can help you save money on the eclectic bill. Examining your existing contracts and comparing them to other vendors may suggest making a switch, or negotiating new contracts with your current partners.
However, two of your biggest expenses are probably interest payments and taxes. Give your accountant a call and find out what they are doing to save you as much money as possible. Look at refinancing your debts to get lower monthly payments. Another significant expense is your labor force. Although job loss is a painful part of any recession, you may need to reduce employee hours or reduce the number of your employees, as difficult as that may be.
Deepen The Customer Relationship
This may not strike you as the most obvious of things to do to prepare for a recession. But as it turns out, marketing to existing customers is an evergreen business idea, recession or not. It varies widely by industry, but acquiring new customers is expensive.
A construction business may spend an average of $486 on inorganic acquisition, while a financial services company may spend an average of $1,202. With numbers like that, you’ll find it makes more sense to work with what you’ve got already, especially if you’re preparing for a recession.
Fortunately, many of the best strategies for deepening customer relationships these days are free or carry a nominal cost. Post giveaways, contests, and coupons on your social media accounts. Do a live event like a Q&A, especially if you’re a service-based business. Take those emails from invoices and start blasting out a weekly blog post. All it takes is some ongoing content and reaching out to the extended family of customers and clients.
Get a Business Loan Before You Need It
The negative effects of a recession on businesses are multifaceted, but a lot of them can be solved with cash reserves or a line of credit. Emergency savings can help prepare your business for the severely reduced cash flow that is symptomatic of reverse economic growth.
Unfortunately, most businesses, especially small to medium-sized businesses, are not able to have substantial emergency funds or savings accounts that can go beyond a few weeks, if that. A recent study conducted by JP Morgan Chase found that most businesses could actually only last 27 days without additional funds and that they are essentially living month to month.
A non-collateral business loan, like one you can get from us at ECS, can help deal with this problem. Moreover, being proactive about getting a non-collateral business loan or line of credit before a recession can go a long way. Although interest rates usually fall during a recession, this recession is going to be something special, because it’s coupled with rampant inflation…and raising interest rates is one strategy the Federal Reserve is already using to combat that inflation. That said, the time is now to look into getting cash into place so that your business is not numbered among those living month to month.
Conclusion
In summary, if you’re wondering how to best prepare for a recession, having more cash on hand may be the one-size-fits-all solution since it can immediately help pay the bills as you try to implement further solutions. But in reality, having more cash is not always an easy solution to fulfill. So the other tips we’ve outlined above can be utilized to help prepare you to succeed, even when it may seem impossible.
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