In a recession, the economy suffers, defined as contracting for two successive quarters. This results in layoffs or lower wages throughout the economy and lower consumer demand. If you own a small business, predictions of recession can be terrifying. There’s rarely a bailout for small companies like yours. However, a small business with a firm foundation can often weather a recession and come out the other side as strong as ever. The better prepared you are, the higher your odds of survival.
In a recession, companies that are highly leveraged are at much greater risk. These are companies with large debts and fewer assets. If you took out loans to start your business, the sooner you can pay those off, the better. During a recession, your cashflow may suffer, but your loan payments will remain static. That can end up being a huge drag on your business.
In a healthy economic climate, you should always make paying off debt a priority. Taking out debt is normal and often necessary, but it shouldn’t be in amounts that will be difficult to pay off in a lean patch. Like an individual, a company has a debt-to-income ratio comparing how much it earns to how much it spends on debt payments. Yours should ideally be under 36%, though experts vary in their recommendations from 20% to 50%. But imagine the burden on your business if half your profits went to paying off debt! And then, if profits drop, you might be losing almost all of it to servicing debt.
If you suspect a recession ahead, it’s not a good time to borrow money for new capital improvements. Instead, work on paying off the debt you have and keeping a comfortable cushion of cash savings.
Keep Your Employees
While layoffs during a recession are sometimes inevitable, your employees are an investment you don’t want to squander. If at all possible, keep your reliable workers around. It took effort to find and train the right person, and if you let them go, you’ll have to do all that work over when the economy picks up. That’s why it’s often wise to prioritize keeping your workers, even if you have to cut their hours. And if you do cut hours, make sure they still get enough hours to want to stay with you.
Hiring can be cheaper during a recession than at other times, because unemployment is higher. However, unless you are sure you can afford it, it’s not usually a good time to hire more staff. If you do need to hire someone, make sure to get the most qualified workers you can afford. When the economy perks up, these workers will be much harder to find.
Be Flexible and Diversify
During a recession, demand will go down for most small businesses. However, most people are still purchasing some goods and services. How can you give your customers what they need at a price they can afford? A recession is a good time to break out discount options that may not have been popular before. Or you could try new products your customers will find essential. That doesn’t mean you need to pivot your entire business or break into new markets. Just ask yourself, what do my current customers want that I can provide?
To keep your current customers loyal, you can begin loyalty programs or discounts. How can you reward your usual customers for sticking around when money is tight? This can be as simple as a punch card for a free coffee or lowered rates for your services for some customers.
You should also diversify your personal finances. If all of your money is in your business, you don’t have very much leeway if things go badly. Having some cash reserves, some equity in your home, and some investments put you in a good position if you need to infuse cash into your business or pay your bills during a lean month.
Is Your Small Business Ready for a Recession?
If your business is over-leveraged or short on cash, you may not do well in the next recession. Talk to your advisor about how to shore up your business so you’re ready for whatever comes. If you don’t yet have a financial advisor specifically for your business, we can introduce you to an experienced professional when you contact us.