You don’t have to do much digging to find countless business headlines claiming an economic downturn is looming on the horizon.
These reports sound the alarm about ballooning corporate debt and slow growth in corporate earnings. Generally, the ratio of debt to corporate earnings rises during an economic downturn. In fact, S&P Global Ratings officials recently noted that the current levels have exceeded those the U.S. experienced just before the Great Recession, indicating companies are "as vulnerable to downgrades and defaults as they were in the run-up to the 2007-2008 global financial crisis."
Elsewhere, consumer debt is hovering at similar levels to the financial crisis while housing prices have hit an all-time high. Taken together, this seems to paint a somewhat bleak picture. But as with anything, it's important to consider these factors in a broader context – particularly for small business owners worried about their prospects should the economy slump into a recession.
Seizing success in any economic scenario
For starters, most people have misconceptions about debt. They see debt in a negative light, even though it can be incredibly beneficial. When debt allows a company to develop and deliver a new product or service to consumers, for example, it's certainly not a bad thing.
Many small business owners see massive corporations taking on billions of dollars in debt, and they assume those companies are struggling to survive. In truth, they're typically using that money to grow their operations.
The trick with debt is only taking on as much as you will be able to pay back in a timely manner, which is something many small businesses find difficult. Smaller businesses don't have the same backing or deep pockets as their large counterparts, so they need to be cautious about racking up more debt than they can handle.
This misunderstanding of basic financial principles can cause people to misinterpret economic indicators. Despite some discouraging signs, the economy is fundamentally in a strong place. Employment rates, wages and the stock market have remained in a healthy place since the 2016 election. Average hourly wages have risen by 2.8 percent since last November, and unemployment has fallen to 4.1 percent – a 17-year low.
For the average small business owner, prudent practices can keep things humming along in every economic condition. Here are seven pointers to help your small business remain viable:
Take care of your cash flow.Expenses are a constant, but the amount of cash flowing into your business isn't a certainty. The best way to protect your cash flow is to promptly send out invoices and regularly review your receivables. In doing so, you might notice that some clients consistently make late payments or are flagrantly overdue. Resolve these issues before they become lingering problems.
Double check your inventory management processes.Doing things the same way for years on end might seem convenient, but it isn't necessarily cost-efficient. While you're reviewing your receivables, spend time examining your inventory practices. Are you ordering excessive quantities of certain items? Could you perhaps buy certain products at a better price from different vendors? There are plenty of ways to cut costs, so don't get caught up doing things one way because it's what you're used to.
Master your core competencies.It’s never a bad idea to diversify your small business, but simply adding products or services for the sake of doing something new is not the best strategy. Even during an economic boom, attempts to break into new sectors can damage your core operation by siphoning away valuable time and money. Instead of potentially damaging your company by veering away from your core competencies, focus on being the absolute best at what your business already does well.
Capitalize on your current customers.Talking to your customers is a great way to size up your competitors and potentially increase sales. Existing customers are familiar with your company, and some of your loyal clients are likely more open to upsells.
It's also significantly cheaper to market to people who are already aware of your company and product offerings. Instead of traditional marketing avenues, you can simply offer these users access to perks, such as early access to new items or special discounts. As long as you show your customers how much you value them, they'll keep coming back for more (and tell their friends to do the same).
Get a leg up on the competition.Once you've secured your existing clientele, recession-proofing is all about finding ways to expand your customer base. Whether you're in a niche or mainstream market, that means taking customers away from your competitors.
If you aren't familiar with other companies in your industry, it's time to do some research. Watch their ads, sign up for their email lists, visit their brick-and-mortar stores, and visit their social media pages to keep tabs on everything they do. Watch for qualities that separate your business from theirs, and do your best to offer something unique that nobody else can match.
Never stop marketing your business.Regardless of the economy, never stop marketing your business. If consumers don't know about your company, they can't do business with you. A lean market provides you with an opportunity to distinguish yourself from other businesses by emphasizing your superior product or outstanding customer service.
Explore paid marketing efforts as well as less expensive routes – particularly social media. A well-crafted Twitter account, an active Facebook page, and an eye-catching Instagram profile offer excellent ways to draw consumer attention without breaking the bank.
Keep your personal credit in great shape.You might do everything right and still end up in trouble because of unexpected financial twists and turns. This could require you to take out loans to keep your company in business, which is much easier when you have a stellar credit score.
A tough economy makes it more difficult to secure capital, and small business loans are traditionally among the first funding sources to disappear. If you have great personal credit, however, it's far more likely that you will be able to borrow any funds necessary to keep your business afloat. Watch your credit score like a hawk, and do whatever you can to keep it in excellent shape.
Some experts anticipate an economic downturn in the near future, though it's impossible to say exactly what will happen. Regardless of the state of the economy, it's important to prepare your small business to weather any storm. Prudent financial practices not only provide the foundation for a successful business, but they also afford assurance that your small business will remain viable in a bear market, as well as a bull market.