How to Prep Your Business for a Recession

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Written by Guest | Last Updated October 30th, 2019
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Guest Post by Barbara Davidson

After the Great Recession of 2008, entrepreneurs and economists alike fear the warning signs of the next national or global decline. Experts suggest preparing for “when” it happens, not “if” it will happen. With trade uncertainty, an upcoming presidential election, and increasing international tensions, small businesses need to plan for the worst. In order to make it through the rough times, these seven strategies can help you prep your small business for a recession.

1. Start saving aggressively

You’re going to need to secure a financial cushion for the hard times ahead. Just like individuals, a business should aim to have a cash reserve saved in the bank worth at least 3–6 months of operating expenses. Make a habit of regularly reviewing your overall budget and revenue stream(s). Limit or delay large purchases if at all possible. If you can cut any costs now, you’ll be able to build your emergency fund even faster.

2. Repurpose your product or service to new industries

During a recession, you need to expand your reach to more customers, not fewer. A recession inevitably affects your most loyal clients, so you’ll have to proactively mitigate a potentially severe dip in your customer base. While it may seem like a smart move, developing new products and services can be extremely costly and time-consuming, particularly during an economic decline. Combat this loss in revenue by repurposing your product or service to reach different audiences. You may need to get creative, but a slight adjustment in your marketing strategy can pay off in the long run.

3. Maintain your marketing efforts

Your marketing budget may fluctuate, but you should never eliminate your efforts entirely. Diversify your advertising methods, and make sure to optimize your business’s online listing. Look for ways to employ more affordable marketing strategies and utilize all the free word-of-mouth marketing you possibly can.

4. Improve or build business credit

Most small businesses fail due to a lack of capital. Your business credit is as important as your personal credit. Bad credit can negatively affect your business, whether or not vendors choose to work with you, your ability to secure financing and more. If you do have bad business credit, take action to improve your business credit now.

When you’re not under duress and your finances are healthy, you’ll most likely have an easier time getting approval for funding, like a line of credit or small business loan. Banks and other financial institutions are not immune to recessions, and they may tighten their lending requirements and terms during a recession. You can also use funding to carefully build up your cash reserve, but make sure that you’re able to afford the repayment structure and any associated fees before you commit.

5. Keep minimal inventory on hand

Don’t let depreciable inventory eat up your cash flow. Maintaining more stock than you need is an avoidable liability, and it requires a larger back room or warehouse for storage. If you must stock inventory in a storefront, make sure you’re highly organized with tracking, maintaining and storing your merchandise. Or, consider a drop-ship model that can help save you money on storage and shipping costs.

6. Negotiate better rates

You should proactively try to reduce costs, provided that the quality of your service or product won’t decrease. Seek out ways to lower fixed operating expenses now so that you’ll have fewer stresses to manage later. Small businesses are especially vulnerable to economic downturns, and your vendors may change or go out of business. Make sure you’re not completely reliant on one particular supplier or manufacturer so that your business can continue if another fails. Always negotiate for a better price and don’t be afraid to break ties with unsustainable relationships.

7. Give your reduced budget a trial run

Make sure that you can actually operate your business on a conservative budget. Try to factor in the worst-case scenario with inflation and a reduced income and cash flow. Are you going to survive the storm or do you need to cut your expenses even further? Though you can’t predict the future, this financial test run can help you spot vulnerabilities and get you (and your staff) used to doing more with less.

Don’t wait until dire times force you to make desperate, hasty decisions. It’ll never be easy to cut ties, but eliminating a costly expense now will save you more money in the long run. Arm yourself and your business with recession-proof strategies for now and beyond to get a leg up over the competition.

Barbara Davidson manages content strategy at Headway Capital, sharing her expertise in business funding, marketing, management, and all things small business through the company’s blog.

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