How SMEs Can Prepare for a Recession
Recession is one word that every business owner is scared of. But, it is bound to happen sooner or later. Because the economy is never constant, just like a business. It is either growing or declining. There will always be boom times and recession periods for every business.
The backbone of every economy is small businesses. Although they are small, they are mighty in generating economic activities.
But, recession affects small businesses more than larger ones because of low financial capacity to cushion the effects. But, every business owner should put a plan in place to weather the storm if it happens. If you do not have a strategy in place and the economy begins to decline, you may find it hard to turn the ship around.
Although recession will not last forever, it will surely come. There is no specific formula to predict when it will happen or end. But, there are some warning signs that you should look out for, such as deflation, inflated interest rates, crashes in the stock market, and so on.
Is Recession Predictable?
The first recession recorded in the USA was in 1797, and over 45 recessions have reportedly happened since then. Although recessions are inevitable, today’s economists are now able to foresee and predict them. And their predictions have always come with a high degree of possibility and certainty. But, they still find it difficult to predict how severe the recession will be and when it will end.
However, economies can now do better in preparing, averting, or reducing the effects of recessions with the prediction of professional economists.
Are There Any Benefits That Comes with Recessions?
Generally, recessions are known for their harsh negative effects on economies. Besides the doom and gloom associated with recessions, some positive effects come with them. But, most recessions discussions are focused on their negative effects on individual and business economies. Recessions bring corrections to the system, and it is one positive effect that it has on the economy.
How Can Small Businesses Prepare For Recessions?
Your small business needs only a little planning to weather the storm of recessions whenever it occurs. You have to be ready for any downturn at any time. So, here are proactive ways to recession-proof your small business:
- Pay Attention to Your Cash Flow
It is a clear fact that cash flow is king for businesses, especially during recession periods. Focus on cash flow may not be a top priority during good times. When there is enough inflow of cash, a critical view of your financial records may not be necessary to ensure there is no lack of money to operate.
Recessions can be very scary when you lack focus on your cash flow. A survey revealed that most small businesses can only remain operational within 27 days when hit by a recession. It means that these businesses will only meet up their cash outflows duties without any cash inflow within 27 days. But, every business does not fall into this category.
Cash is crucial for your business to remain afloat during downturns, especially recessions. So, ensure you have enough cash reserve that can last you as long as possible. You can implement these factors to maintain a healthy cash flow.
- AnalyseYour Payables
It is also easy to ignore when times are good. Examine all your payables and their due date. And double-check their accumulative sum to ensure that they are correct. If you can, extend your payments to their due dates.
- Analyse Your Receivables
You can easily stretch your receivables longer than they should during good times. But, the case will be different during downturns because your net will not fly now. So, follow up on your past due receivables and collect them. You can add late payments as an effective way of prompting them to pay you in real-time.
- Reach Out To Your Lenders
It is usually possible to struggle with your loan payments during recession times. But you can get ahead of it on time by contacting your lenders to find out possible leeway they may offer you. Ideally, they will be willing to work with you than see you default.
- Review Your Budget
If you have not been sticking to your business budget, this is the best time to start. You should review your current expenses first and detach any unused services or subscriptions. Devise creative means of cutting down expenses without it affecting your business. Although it is time to cut down your excesses, do not cut everything to the detriment of your business.
- Reach Out And Negotiate With Your Vendors
It is time to negotiate your current payment terms with your vendors. For instance, if you pay upon receipt, you can ask for a net 30 or 60 payment terms that will sustain through the next month or two. They may probably not accept your offer because of cash issues on their side, but you may get a yes when you try.
- Have A Well-Articulated Business Plan
Another good way to recession-proof your small business is by having a well-articulated business plan. But, this plan should focus on forecasting future good times. Do not pay much attention to predicting future downturns at this moment. Let the plan focus on the status quo, which is growth.
You do not necessarily need a complete written business plan to prepare for this. Instead, pay attention to how you can build a financial forecast that covers cash flow, profit, loss, and balance sheet.
- Improve and Maintain Your Business Relationships
The relationship between your business and various stakeholders such as suppliers, creditors, customers, and staff members is a vital factor in managing a recession. How these relationships will help your business survive a recession may differ. But, they will make a difference, whether individually or collectively.
For instance, your loyal and long-time customers may continue patronizing your business even in bad times. Or when offered lower prices by your competitors. If you have healthy relationships with your suppliers and creditors, you can access crucial credit lines or raw materials that may be useful during downtimes.
- Reduce Your Debt and Expenses To The Barest Minimum
You can use debt as a double-edged sword tool for your business growth. But, if you fail to manage it properly, it might lead to the downfall of your business.
During good times, debt can contribute to your business growth in so many ways. But, you will see its negative effects, especially high-level debts, when there is an economic recession. Because of the reduced business activity during these periods, your business might not generate enough revenue that will be sufficient to service your debt.
Businesses can exempt themselves from paying their business debt if they form an LLC or any other business body that allows them to fill for business bankruptcy. But, it is vital to know that sometimes the corporate veil can be pierced, and your business will be liable to pay its debt.
- Cut Down Your Workforce
Workforce layoff is one of the hardest things every business owner will deal with in sustaining the business. As a business owner, you will even feel worse if these employees and their families depend on the income they earn from your business to sustain their livelihoods.
But, during recession times, you may need to do this to prevent your business from going down. Also, keeping your workforce at the lowest at all times is vital. If your business is doing well in terms of cash inflow does not mean you should go on a hiring spree. If you must hire more workers, you should first consider hiring remote workers or freelancers. When you do so, your workforce will be at a minimal level without being bloated during a recession. With this approach, you might be able to retain your employees during bad times.
Ensure that a Thrive Financial expert drafts a solid contract for you whenever you want to hire remote workers or freelancers. It will protect your business from any problem that may arise in such situations.
- Never Stop Marketing
It is understandable for most businesses to quit their marketing activities during an economic recession. But, it is recommendable to continue marketing your business or reduce a little instead of completely stopping your marketing activities.
When you continue educating your potential customers with your marketing activities, they are likely to patronize your business whenever they need your products or services. So, never relent in telling them how your product or service can solve their problems.
It is noteworthy to mention that the above-listed ways do not guarantee that your business will come out of recession without hitches. But, it will reduce its effects on your business.
How one small business will manage its business to come out of recession will differ from another. So, seeking professional advice and guidance from Thrive Financial services will help to formulate the best solution for your business.
We’re here to help