How Small Business Owners Can Prepare for a Recession

Recession. Did the word just send a chill down your spine? If so, you’re not alone. It’s the topic on everyone’s mind right now. For consumers, it can feel like a call-to-action to budget and cut out extraneous spending. And for small business owners, a recession could mean a tough road ahead.

We’ve compiled a guide with tips for how to prepare your business for a recession. We’ll discuss what being in a recession means, tips for fortifying your business, and what not to do in 2023. Let’s get started.

Are We in a Recession? What Does it Mean to be in One?

Before you can recession-proof your small business, it’s important to understand what a recession is. The answer is more complicated than you might think.

A recession is generally considered a significant economic downturn lasting more than a few months. That might sound a little vague, and that’s because it is. There are no concrete determinants of a recession, but instead a collection of factors working together that cause the economic dip. Some of the data the National Bureau of Economic Research will track to look for signs of a recession are:

• Personal income
• Employment
• Consumer spending
• Industrial production

Significant decline in these areas could indicate a recession is coming or already under way. Many are asking: is a recession coming in 2023? While we may not be in a recession yet, some experts believe one is on the horizon for 2023. For business owners, the time to start preparing for a potential recession is now.

Inflation vs. recession vs. stagflation.

Inflation and recession are both hot button topics right now. But how do they compare? And what happens when they intersect?

Inflation is a general increase in prices hitting a broad range of products and services. While a certain degree of inflation is considered positive, it becomes a problem when it hits basic necessities such as food and clothing. Inflation impacting those necessities can hit the economy hard.

A recession, on the other hand, is a word describing a period of economic downturn lasting more than a few months. During a recession, unemployment rates tend to increase and gross domestic product growth tends to decrease.

Inflation and recession aren’t the same thing, but they are connected. High inflation rates may indicate a recession is on the way.

Stagflation, however, is another way recession and inflation can intersect. It’s a term coined in the 1970s to describe a period where both unemployment and inflation are high and the economy is not growing. While it’s less common than a standard recession, its impact can be far worse.

Recession Planning and How to be “Recession Proof”

Wondering how to prepare your business for a recession? It can be difficult because recessions are complex and tricky to predict. Preparing your business for one isn’t always a straightforward process. While there’s no way to be completely “recession proof,” small, incremental changes to your business model and spending can go a long way in fortifying your business against economic troubles. Here are our top tips for prepping your business for leaner times.

Be flexible.

In difficult times, your first instinct may be to stick to your comfort zone. Change can feel risky and stressful when your safety net isn’t what it used to be. Unfortunately, strict consistency doesn’t always benefit your business.

During periods of economic strife, consumer priorities change. It’s crucial that businesses make adjustments to meet changing customer needs. This might mean adjusting prices, adding or removing some offerings, or even changing or reducing business hours. Failure to stay flexible could open the door for competitors to surpass you in the marketplace.

Cash in king in a recession.

One basic way to prepare yourself for a recession is to have a cash reserve — and protect it.

It may seem obvious, but saving money for a rainy day is an evergreen financial tip for a reason. Building a strong cash reserve provides you a buffer for leaner times. If profits dip or your business faces unexpected expenses, having a healthy sum to fall back on can be a major relief.

Obviously, it’s easier said than done. It involves thinking ahead and may mean tightening your budget and cutting out unnecessary costs. Try to think of it less as penny-pinching and more as an investment in your business’s future. It’s recommended to aim to set aside enough to cover necessary expenses for at least six months, but the more you are able to save, the better shape you’ll be in.

Reduce nonessential spending.

If there’s any time to tighten your belt, it’s during a recession. Cutting nonessential expenses is a great place to start. Plenty of services and products are designed to make your business more streamlined in some way or increase profits, but they aren’t strictly essential. Take a look at where your money is going, and look for anything that you can cut. Some examples could be extraneous services or subscription software that isn’t being regularly used.

It’s OK — or even beneficial — to be a little ruthless with these cuts. But it’s important to learn how to save during a recession in a way that won’t backfire.

Many businesses deem promotional expenses to be unnecessary and end up slashing their marketing budgets. This can be risky. Recession marketing helps maintain and grow brand awareness, draw in new clientele, and can help set you apart from your competition. You may not be able to see the immediate benefits of it, but gutting your marketing budget can lead to unintended long and short-term consequences.

If you’re still eager to save money on marketing, it’s OK to cut back slightly, as long as you’re not dropping it altogether. And remember, not every form of marketing has to be costly.

Word-of-mouth advertising is a low-cost way to market your business with customers and clients recommending you to family and friends. Check out our free guide for mastering word-of-mouth marketing for tips to get the word out about your small business.

Diversify your offerings.

Economic downturns are never easy. They can be especially difficult for small businesses that offer only a select number of services or products. To minimize impact, business owners should consider finding ways to expand or innovate their offerings. That way if one product line or service offering slows down, another might be able to pick up the slack.

Think about what else you can offer and how you can differentiate yourself from competitors. If you produce goods, think about what might be in demand during a recession.

Think, for example, of retailers and clothing manufacturers who pivoted to producing cloth masks when the COVID-19 pandemic began. They saw a need and switched gears to help fill it. While the demand for masks wasn’t permanent — these retailers saw sales drop off sharply when the mask mandate ended — it helped keep them afloat during a difficult economic period.

So what can you offer that consumers want or need during a recession? You may want to join forces with another business that provides services that naturally fit alongside yours. Or think about the “lipstick effect.” This is the trend of people willing to pay for smaller luxuries during periods of financial difficulty. If you run a shop or spa, consider adding more self-care items to your offerings.

Listen to customer feedback.

Running a small business is a lot of work. You put a lot of time and effort into it, and it’s easy for the decision-making process to feel very insular. It’s important to resist the urge to keep it that way.

Try to break outside your own bubble. Reach out to customers and clients for feedback. If business is slowing down, it’s a great time to take the temperature of your patrons. You’ll find out more about what is and isn’t working for them as customers, and you can make adjustments to meet their needs.

Not just that, though. You also never know where the next great idea for your business will come from. A simple survey of your clientele could yield some truly innovative suggestions.

Keep on top of payments and collections.

Recessions impact everyone, both business owners and consumers alike. You might find that you’re not receiving payments as quickly as you once did, and customers may struggle to get funds to you on time.

In a recession, collections of payments and debts should be a priority. Pay close attention to payment trends. If payments are consistently late, consider changing your payment terms. This might mean incentivizing early payments or offering new repayment options. Even a new payment processing system — such as Zelle or Square — could help make payments more accessible for customers.

If you have customers who are in collections, stay on top of it. It’s tempting to put off reaching out for late payments. Try to make it a priority. If it’s impacting your cash flow, you can’t afford to ignore it.

Recession layoffs: hard but sometimes necessary.

Downsize if you must.

It may be unsavory, but downsizing shouldn’t be off the table in the face of a global recession. No small business owner makes the decision to lay off employees lightly. But if your business is still struggling to stay afloat in spite of your best cost-cutting efforts, downsizing may be the last resort.

If you can no longer afford employees but still need workers to keep things running, consider working with contractors or freelancers. You’ll be paying less than you would for a full-time employee, and the freelancers can be project-based, so you hire them only when you need them.

Protect What You’ve Built

Your small business isn’t just a job. It took time, research, and sweat equity to build. Between managing employees and handling administrative upkeep, you put all you had into starting and maintaining your business. Not everyone understands how many hours you’ve clocked to make sure everything runs smoothly. Simply Business® does.

We work with small business owners every day, finding insurance solutions to fit their needs. We know how much effort you’ve put into your livelihood, and we’re here to help you protect it. Business insurance is there for when the unpredictable happens.

Start your free quote online today. We’ll ask you a few questions and help you find options with a number of leading insurance carriers. We shop options with major insurers and compare prices and coverage to help you find the best and most affordable policy.

Our business is protecting yours.

Corners You Shouldn’t Cut

We’ve covered what to do to prepare your small business for a recession. So is there anything business owners shouldn’t do? Let’s take a look at some strategies to avoid when we’re on the brink of a potential economic downturn.

Think twice before paying off debt

For business owners who are saving money for a rainy day, it may be tempting to pay off debts. But doing so can do more harm than good.

Remember when we said cash is king during a recession? Paying off a large chunk of debt has the potential to deplete your hard-earned cash reserves. During uncertain economic times, you may be better off preserving that financial cushion.

Don’t compromise on quality

When tightening their budgets, small business owners may find themselves faced with a difficult decision. Are they willing to compromise on the quality of their products and materials to reduce costs?

As tempting as it may be to cut corners, you don’t want to sacrifice on quality. Doing so could damage your company’s reputation and potentially drive away clients. Stay the course and keep providing the best possible goods and services, even during difficult times.

Act Now, Thank Yourself Later

Life is full of peaks and valleys. There will always be difficult times to endure. The best you can do is to hope for the best but prepare for the worst. Make small changes to make your business more efficient and reduce spending where you can. Even the smallest change could help your small business weather the storm.