Small Business 101: Preparing for a potential recession
Multiple inflationary forces have combined to impact nearly every business in America. Here's what you can do to get past financial obstacles (and there is some good news).
Unless you’ve been living in a cabin in the wilderness with no electricity or internet, you’ll have noticed that consumers and businesses have had a lot to contend with this year, including supply chain delays, increasing costs for energy and materials, rising rents and interest rate hikes.
Given that backdrop, it’s no shocker that the dreaded R-word keeps coming up in discussions about the economy. But the good news is that, so far, U.S. consumers are still spending money, according to Ben Johnston, who’s COO of Kapitus, a business-to-business service based in New York.
Here’s what he said small business owners can do to prepare for a possible recession.
How is inflation impacting small businesses?
First, wage inflation driven by strong demand for labor and fewer participants in the labor market post-COVID. Second, increases in the cost of inventory and raw materials, driven by supply chain disruptions and the rising cost of energy. Third, rising real estate and rent expense. And fourth, rising interest rates, making it more expensive to finance inventory, the build-out of facilities and working capital for growth. Together, these inflationary forces have combined to impact nearly every business in America.
Higher inflation, interest rates and energy prices are likely to be with us for the foreseeable future, as are the global supply chain problems that continue to plague U.S. manufacturers, contractors, retailers and other American businesses. Given these obstacles, it is prudent for U.S. business owners to look for ways to lower overhead costs, capitalize on potential efficiencies, and consider product offerings that may appeal to changing consumer tastes in a slowing economy.
Retailers will need to assess current inventory levels and review sales trends frequently. At the same time, personal income and personal consumption have grown in 2022, meaning that despite higher gas prices and other inflationary pressures, the American consumer continues to spend. This is good news for small businesses, the majority which derive their revenue from consumer spending.
How should small businesses be preparing for a potential recession/economic downturn?
Nearly all businesses are cyclical, and most follow the general expansion and contraction of the overall economy.
Many small businesses, in addition to being cyclical, also tend to be seasonal, causing them to expand and contract at several points throughout the year. As a result, most small businesses know the importance of keeping a tight handle on expenses as many need to expand and contract their labor costs, inventory, energy expenses and financing lines throughout the year.
The most successful small business owners have created strong relationships with employees, suppliers and financing partners who understand their need to expand and contract and who provide services to help business owners manage through these cycles.
What are some strategies/best practices for staying afloat when business slows?
When a business slows, it is important to pay close attention to cash flow. Businesses should ensure that they have sufficient cash on hand to weather a prolonged period of reduced sales. This means exploring improved payment terms with vendors, working with financing companies to understand what financing is available to the business, and looking closely at ways to turn fixed expenses into variable ones.
Businesses should avoid placing large bets during uncertain times. This means avoiding taking over the space next door while sales are declining, even if the landlord is offering a “great deal,” and staying away from large, long-term expenditures such as buying new equipment or launching a new product line unless there is a clear financial return and demonstrated demand.
Controlling labor costs is a big issue for many businesses, including restaurants, many of which are installing QR codes to allow for remote ordering and more self-service options. Restaurants are also encouraging customer pick-up over delivery and adjusting menus to feature cheaper and less labor-intensive items for their kitchen staff.
Consumers are feeling the pain too and cutting expenses. How can small businesses retain customers right now?
During recessionary periods, customers become more price conscious, so it’s important for businesses to consider adjusting product offerings to fit changing customer tastes. For example, retailers may see value in stocking lower-cost items instead of higher-cost brand-names.
Restaurants may explore reducing portion sizes to hold prices flat, but then offering a “super-sized” option for those willing to pay more. Manufacturers may reduce customization, reduce size, or eliminate stylization that doesn’t impact functionality. Meeting the customer where they are and helping them save should pay dividends.
Join our LinkedIn group, ALM’s Small Business Adviser, a space where small business owners can gather to network, have discussions and keep up with the trends and issues affecting their industries.
Related:
The coming financial storm: What independent agents need to know
How the changing workforce & rising interest rates impact workers’ comp