It’s a burning question in 2022: Is a recession coming?
The answer isn’t as straightforward as yes or no.
Just like the weather, the U.S. economy has been unpredictable. After a decline in the second quarter, the Bureau of Economic Analysis reported that as of the end of the third quarter of 2022, the economy, as measured by gross domestic product (“GDP”), reversed direction and actually grew at an annual rate of 2.6%.
Despite the recent upturn, some experts believe it is quite likely that the U.S. is headed for a recession in 2023 as persistent inflationary pressures force the Federal Reserve to shift interest rates higher than expected.
Figuring out how to prepare for a recession can be daunting, but there are things you can do to get ready for tough times.
Being proactive is critical, so we have ideas and strategies to help your small business copy with a recession.
We all know a recession isn’t good. But what is the definition of recession?
Not everyone agrees on a definition of recession, but the general consensus among economists and central banks is that a recession occurs when there are two consecutive negative quarters of gross domestic product growth rate. At this point some economists will declare, “We’re in a recession!”
However, as I already mentioned, the economy bounced back in the third quarter of 2022 — leaving many people scratching their heads and asking, “Is a recession coming?” or “Are we in a recession?”
The two-month rule isn’t a perfect science. That’s why economists also look at nonfarm payrolls, industrial production, retail sales, and other indicators to help measure a recession.
So who decides if we are in a recession?
The Business Cycle Dating Committee, which is part of the National Bureau of Economic Research (NBER) is ultimately who decides when we are in a recession. The NBER is a private, nonpartisan organization that analyzes major economic issues. Because the committee relies on lagging government data that take a while to collect, it typically can’t officially declare a recession until after the recession begins.
You don’t have to work for the NBER to see some of the day-to-day indicators of an impending recession. What are the signs of a recession? Look around, and you’ll notice higher gas and food prices, layoff announcements, and slowing home and vehicle sales. These are just a few indications that signal trouble ahead.
If you’re concerned, you’re not alone. According to a survey by Goldman Sachs, 93% of small business owners are worried about the U.S. economy experiencing a recession within the next year. You may be wondering, “How does a recession affect me?” Recessions can affect businesses of all sizes, but small businesses are especially vulnerable because they may not have enough financial cushion to carry them through tough times.
Here are some ways a recession can impact a small business.
Many small businesses operate on a money-in/money-out basis, meaning they don’t typically have a large amount of cash stashed away. In a recession, your clients may have trouble paying you on time. And your customers may stop shopping. If there’s no money coming in, this throws off your cash flow cycle. You may fall behind with payments to vendors and other expenses, putting your business at risk.
Rising costs can affect the way people spend their money. During a recession, your customers may cut back on purchases and put their money toward essentials. That means their daily chai latte may become a weekly treat. Small businesses that depend on regular customers for the bulk of their revenue could lose a significant amount of income if customers reduce their purchases or stop buying altogether.
If a small business is struggling to keep the lights on, one of the first expenses to go may be marketing. While that may seem like a wise choice, cutting back on marketing efforts could be detrimental to your long-term growth. Without marketing, staying engaged with your current customers and attracting new customers to offset your loss can be difficult.
Lenders know that many small businesses are operating without a financial cushion, which means they are less likely to lend them money. Unlike publicly listed companies, small businesses typically can’t raise funds by selling stocks or lobbying the government for help.
A recession can be a challenging time for small business owners, but that doesn’t mean your business won’t survive. There are several steps you can take to gear up for a recession.
You don't want to be unprepared when there’s this much talk about economic uncertainty. Now is the time to review your business and look for ways to reduce unnecessary spending.
Are you paying for software that you’re not using? Are you overspending on product packaging? Start making the changes that will help you conserve enough cash for the future.
Guess what? Recessions affect almost everyone. That means your clients may have trouble paying you on time. Make an effort to stay on top of collections before things get worse.
Or if a client is struggling, work with them to create new payment terms. They will appreciate the flexibility and be more likely to continue making payments.
Trimming your expenses is one way to bolster your savings. Another option is converting assets to cash, such as selling a vehicle or machinery you no longer need.
If you’re wondering how much money you should have on hand, the general rule of thumb for small business owners is three to six months. However, in a recession, one year of business expenses is recommended.
Some small business owners may use loans or cash advance credit cards when cash reserves are low. If you’re considering this, assess the payment amounts carefully to ensure that debt won’t put you in a more difficult financial situation.
If you are currently paying off debts, consider paying down the debts with the highest interest rates to free up more cash for savings.
Declining sales can be discouraging for a small business owner. Regardless, your customers likely want you to stay in business. Keeping them happy is one way to ensure that you do just that.
A recession is a great time to focus on service and customer retention. Keep an open line of communication with your customers so they understand your challenges and you understand their changing needs.
One business expense you can’t afford to cut back on is insurance coverage. Claims and lawsuits can be even more financially devastating during a recession. You’ve worked hard to build your business, and having the right business insurance can protect you from loss and liability.
If you need help finding affordable insurance coverage, we can help. We work with numerous leading insurers to find the coverage that meets your needs and budget. And we make it easy to understand what you’re getting and how much it costs.
Want to see policy options from some of the nation’s top insurers? Get started right now with our free quote comparison tool.
If you’re losing sleep over the current economic gloom and doom, we get it. You can’t do anything to stop a recession, and that can be unnerving for a small business owner. It may be hard to stay optimistic, but we have some tips to help you maintain a healthy outlook.
Don’t underestimate the power of a long, deep breath. It can be an effective way to help gauge your emotional state and regain focus. If you’re feeling anxious or overwhelmed, try breathing exercises or light meditation to help calm your mind.
Stress can prevent you from seeing the bigger picture, so practicing mindfulness may give you the perspective you need to navigate challenges.
While the idea of taking your eyes off your business for a minute may seem unbearable, it’s important to take an occasional break to do the things you love.
Read a book, go for a run, or binge-watch a comedy. Make time for friends and family, but set a “no shop talk” rule so you can truly free your mind.
Feeling uncomfortable and anxious during a recession is normal, but don’t let your emotions drive your business decisions. For example, if a local small business begins laying off staff, don’t assume you have to make the same decision.
Take a breath (see above) and determine if your thoughts and actions are driven by a real financial threat, supported by data — or fear.
A recession is often associated with challenges and hurdles, but it also may present your business with a new opportunity.
Whether it’s downsizing your restaurant to a food truck or transitioning a brick-and-mortar shop to an online store, being open to change may help your business weather the storm. The COVID-19 pandemic is an excellent example of how some small businesses pivoted to stay afloat.
While there’s nothing you can do to stop a recession, here’s some good news: Recessions end. Every economic downturn in history has ended with an upturn. So hang in there, make a plan, and look to the future.
I've always loved to write and have been lucky enough to make a career out of it. After many years in the corporate advertising world, I'm now a freelance writer—running my own show and contributing to Simply Business. Fun fact: I have three desks in my house, but I still do my best thinking walking in the woods.
Susan writes on a number of topics such as workplace safety, customer sales, and workers' compensation insurance.
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