A bad economy is like a tornado – it tends to come out of nowhere, and small businesses tend to be affected the most. Although nobody can predict or control when a recession strikes, you can control what you do to prepare, including getting smarter about cash flow, debt and inventory management.
How to recession-proof your business
For the average small business owner, prudent practices can keep things humming along in every economic condition. Here are eight pointers to help your small business remain viable.
1. Take care of your cash flow.
Managing your business’s cash flow is critical during times of uncertainty, and many small businesses fail because they don’t control it properly. One way to protect your cash flow is to send out invoices and review your receivables promptly. 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.
2. Be smart about debt.
Many small business owners see massive corporations taking on billions of dollars in debt and assume those companies are struggling to survive. In truth, they’re typically using that money to grow their operations. The trick with financing is to maintain a healthy level of business debt, which many small businesses find difficult. Smaller businesses don’t have the same backing or deep pockets as their larger counterparts, so they need to be cautious about racking up more debt than they can handle.
3. 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 better prices from different vendors? There are many ways to cut costs, so don’t get caught up doing things one way because it’s what you’re used to.
FYI: Tracking technology can help you manage inventory. Learn which POS systems improve inventory management.
4. 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 what your business does best, focus on your core competencies.
5. 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. Being able to upsell and cross-sell can pay off big time in a moment of need.
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).
Did you know? According to a Marketing Metrics study, the probability of landing a new customer is only 5% to 20%, while selling to an existing customer has a success rate of 60% to 70%.
6. 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. Note any qualities that separate your business from theirs, and do your best to offer something unique.
7. 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 allows you 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 and video sites. Platforms such as Twitter, Facebook, Instagram, YouTube and TikTok offer excellent ways to draw consumer attention without breaking the bank.
FYI: As of 2021, TikTok counts 80 million monthly active users in the U.S., and Instagram has over 115 million. Learn more in our guide to social media marketing for small businesses.
8. 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 a loan to keep your company running, 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. Know the difference between a personal and a business credit score. If you have great personal credit, 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.
Frequency of recessions
Despite countless technological, social and economic advances over the last century, we still haven’t conquered the business cycle. Recessions remain relatively frequent. Between 1945 and 2022, the U.S. experienced 13 economic recessions – a downturn once every six years, on average.
Although the typical contraction is mild and lasts for less than a year, even a temporary slump can pose severe risks to a small business’s cash flow. The Federal Reserve estimated that up to 200,000 U.S. establishments closed permanently following the brief pandemic recession of 2020.
Silver linings of a downturn
The good news is that most of these slumps are relatively mild, and the U.S. economy has seen astounding growth over time. Real GDP per capita increased from just $14,500 in 1950 to $59,553 at the end of 2021, according to the St. Louis Federal Reserve Bank.
When business is booming, many owners and entrepreneurs are preoccupied with keeping the wheels from flying off the bus, and it’s easy to overlook the details. A slowdown provides the opportunity to refocus your business and address waste and inefficiencies that tend to creep in over time. Maybe you can negotiate lower credit card processing fees, or perhaps you could reduce abandoned e-commerce carts with email marketing. When the economy inevitably returns to growth, your business will be well-positioned to hit the ground running and perform even better than before.
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 both a bear market and a bull market.
Darin Namken contributed to the writing and research in this article.