5 ways small business owners can prepare for a recession
Flexible business owners are the ones who survive recessions and challenging times.
There’s been talk of an impending global recession since summer, and as the months pass, the conditions are ripe for one as a result of record-high inflation and other special circumstances.
Although recessions are scary for any company, small businesses are particularly vulnerable in these uncertain times. They often don’t have access to the same resources as larger companies, and small businesses must be creative and resourceful to survive.
While no two small businesses are alike, there are certain steps any owner can take to thwart the dramatic impact of a recession. Here are five tips to help you prepare for and navigate a possible upcoming recession.
Take a good, hard look at your business expenses
Cutting expenses will help maintain your cash flow. There’s no better time than now to audit and understand your costs. When you know where your money is going, you can make appropriate adjustments to save when you need to.
For small businesses, employees can often be the most significant expense. Use this time to outline related costs. Will you be able to maintain your current workforce? You may have to lay off some employees or initiate a hiring freeze.
Don’t forget to look at the loans you’ve taken out and make a note of when they’re due. Make sure you have an excellent relationship with your banker. They can be your best friends or your worst nightmare during hard times.
Focus on what people are spending money on
In tough times, it’s easy to focus on the bad — such as where people cut spending. But, even in recessions, people have famously spent earnings on experiences such as movies, dinners and drinks out, or video games, in addition to basic necessities such as groceries and bills.
In fact, some businesses thrive during tough economic times. Consider how AirBnb disrupted the hotel industry when it launched during the 2008 housing crisis. Not only did it allow people to travel for less, but it provided homeowners with an opportunity for income by renting out a room.
Look at what makes the most profit in your business. Can you focus more there? Where else can you anticipate a potential pivot to address new demand? Capitalize where you can.
Your business should be able to adjust to the behaviors of consumers right now, then be ready to evaluate your options and quickly adapt your business for the better.
Be open to new opportunities
As consumer behavior changes, there may be new opportunities for your business. For example, perhaps you’re in a position to take over another small business. While it may be a risk during the recession, it may also serve as a wise investment once the economy returns. Many smart business owners have taken over other companies in their industry at bargain prices and have reaped the rewards in the next upturn.
Buying a business means you can skip all the setup work and inherit something that has an established structure and customers. It’s typically easier to secure financing in these cases, too. A merger — when two separate businesses create a joint one — might be another option, depending on the business. Typically, mergers don’t require cash, but it’s important to know who you’re combining with and laying out the management structure. If either of these are possible, talk to your trusted advisors to find areas of opportunity.
Attitude is everything
Flexible business owners are the ones who survive recessions and challenging times. As difficult as it may be, it’s best to remain open to new ideas and experiments, even if you feel you’ve already tried them.
Flexibility is one of the advantages small businesses have over larger corporations. You can make changes quickly — from offering new products or services and changing your pricing model. If beneficial, you can jump on trends while they’re still hot.
Focus on the good and opportunities for success from such a difficult period. Now’s the time to move out of your comfort zone and grow where you can. Bounce ideas off those you trust, such as your managers, a business coach, or other small business owners in your network. Fresh ideas often come from collaboration, and someone else may see a clear vision for your business.
Make a plan for the future
When times are tough, it isn’t easy to think things will get better, but they will. And when they do, you’ll need a plan. Assess where the business is. Then evaluate if your previous aspirations for your company still seem viable or if you have a new vision for its future. Look at your stakeholders; are they on board?
Be honest about the possibility of survival. If there’s a chance the business may not survive the recession, meet with a professional to create an exit plan that’s right for you. Transitioning away from the company sooner than later will have a silver lining.
A small bit of good news is the impending recession might be relatively short and shallow, according to the International Monetary Fund. The 2008 recession was a result of debt excesses, while the current situation is happening because of the pandemic (inflation and excess liquidity).
Surviving a recession as a small business is not easy, but it’s also very possible. Talk to people you trust, such as your mentor or a business coach. Make educated decisions based on the numbers, be realistic, stay positive and keep your head up.
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.
Mark Kravietz, CIMA, CFP, is the Founder and Managing Partner of ALINE Wealth, where he specializes in exit planning. Mark earned the accreditation of Certified Exit Planning Adviser (CEPA) from the University of Chicago’s Booth Business School. He is also a founding member and president of the New York Chapter of the Exit Planning Institute (EPI). For more information, please visit www.ALINEWealth.com.
ALINE Wealth is a group of investment professionals reqistered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.
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