Have you taken time to prepare for a recession?
While we can't predict when the next recession will be, we can prepare our businesses for the next downturn.
Whenever that may occur.
Below are 8 things to keep in mind when preparing your small business for a recession.
How to Prepare Your Business for a Recession
Recession Proof Business Finances
When boom times are around it is easy for a business to get away with some sloppy financial management. (They shouldn’t but they do!)
Yet, when the economy changes, and business is not as easy to win. Those financial leaks will make it harder to stay in business.
So, what should you be paying attention to?
- Emergency Funds – your business should have some extra cash to deal with emergencies. Especially in a recession. Being able to still make payroll, order supplies or go for that next big opportunity will be easier with an emergency fund. You never know when your competitor might be up for sale, because they did not prepare for a recession. If you prefer you can call it an opportunity fund!
- Cash Flow – the time to get a better understanding of your financial flow is now. Running out of cash is one of the biggest problems for a business. You may be showing a profit and have great sales, but if you don’t have cash in the bank it does not matter.
- Asses your debt – can you manage the payments if sales go down by 5%? Do you have covenants that might kick in because of a downturn? Understanding this will help you manage that cash flow better.
Diversification Creates Company Stability
Having your entire business based on one service or client is a good way to end up out of business. Recession or not.
If you only have one method of getting new clients, then you are risking that supply source being cut off or minimized.
Diversification in a business is a great way to ensure that you can manage a recession.
To prepare consider the following:
- Clients – expand your customer count. The more sources of revenue you have, the safer that revenue stream is.
- Services/Products if you only offer one product or service, it is time to explore other options. You can consider other ways to deliver your service to reach other markets. Or complimentary products for your existing line. Try and imagine what your customers would want during a recession. Do they want a cheaper service? Do they want more help? Understanding what your customers will face during a recession will help you create new offerings.
- Marketing – remember Myspace? What if you were getting all your business from there and never adapted as they began their decline? You would be out of business. If your business now is all from one source, it is time to expand your options. Try and make it something that is completely different. If you are getting all your business from Facebook don’t go to Instagram as your second option. Instead add something like: SEO, live events or association sponsorships.
Good Practices for Business Management
Besides for the above items, ensuring that you are running a tight ship is critical. It is easy during the good times to let things slide. To not worry about the holes because you are finding success.
So, what is running a good business look like?
It includes what we have talked about before, but also:
- Operations– make sure you have detailed processes. That you have taken the time to make sure they are efficient and make your employees jobs easier.
- Client Acquisition – fine tune all details, not just where you are getting customers from. Is your unique selling proposition (USP) perfected? Are you paying attention to your return on investment (ROI)? Do you have the right customer management tool in place?
- People – are you taking care of your people? The better you care for your people, the more they will care for your business. Don’t look at them as a tool, but a human that has dreams too. Making their lives better is an investment not an expense.
- Strategy – do you have the right strategy in place? Do you have the plans to back up that strategy to ensure you are delivering across all business areas?
- Legal – this one is often overlooked, but critical if something should happen. Are your contracts solid? Have you filed all the right forms with the right authorities? Do you have the right insurance?
- Finance – you should be continually paying attention to all your numbers. With the aim of making improvements where you can. As a business owner you can’t dismiss the finance part, because you are not a numbers person. Take the time to learn. Then when things are rocky you understand the implications of your decisions better.
Business Mindset for a Recession
How you think about recessions can be the deciding factor on your success.
If you believe you will lose during a recession you will.
If you believe you will succeed your chances dramatically improve.
Start paying attention to what you are thinking as you work on your business. This will give you an idea on what beliefs and attitudes are guiding you and your business.
These are all changeable, if you are aware of them. But it does not happen overnight. So, starting now is the best way to have a positive mindset down the road.
Business Mindset Example:
Do you think every new initiative is going to be an uphill battle before you succeed?
If you do then, when you grow, you will encounter problems. If instead you change your belief to “success comes to me easily” your journey will be smoother.
How do you do this? Once you identify a belief that needs adjusted, you can do things such as:
- Emotional Freedom Technique (EFT or tapping)
- Meditation to rewire your thoughts.
For more information on How to Change Your Business Mindset
Preparing the Business Owners Finances for Recession
The ability for your business to survive also depends on your own personal finances. If you are living "paycheck to paycheck" or still putting money in the business it will be harder for your business to survive a recession.
With that in mind there are three things you can do for your personal finances that will help.
- Emergency funds - make sure that you have adequate cash to keep you going for at least six months. This is higher than the recommend three to six months, but your circumstances are different. You need more wiggle room.
- Income diversification - just as your business needs to be diversified your finances should be also. This one is harder to achieve, but if you focus on it overtime it will improve. Examples include: partner's income, dividend investing, ownership in other business and rental income (unless of course your business is real estate!). I myself have created a dividend portfolio outside of my business for extra cushion. It has take some time, but every year with reinvesting dividends it keeps getting bigger.
- Overhead expenses - take the time to review your fixed expenses. These are the bills you have to pay every month no matter what. While it can be easy to cut back on dinners out and vacations, you have to make your housing and car payments. The lower your fixed overhead costs are the easier it is for you to trim back and survive a recession.
Things to Keep in Mind When Preparing Your Business for a Recession
One final thing to cover. Recessions are unpredictable. Not only do we not know exactly when they will occur, we also don’t know:
- How long they will be.
- What will trigger them.
- Which industries will be affected the most.
- How bad it will be.
Because of these unknowns, nothing is guaranteed. You can do everything perfectly. But if it hits your industry and goes on for a long time and is a serve recession – you may still not make it.
As you are working on your business, don’t let anyone tell you anything is guaranteed. That is an impossible promise for people to make.
Do the best you can with what you have. If at the end of the day you can say you did all you could – that is a win.
For more help and guidance on improving how your business runs, schedule a free strategy call. We can chat and see if working together would be a good fit! Click this link to schedule today.