What should small businesses should do during a recession?

What should small businesses do during a recession?

Although few words are scarier than “recession,” every small business can do several things to not only survive a recession, but also potentially prosper during a time of economic uncertainty for businesses.

In this guide, we’ll cover what small businesses should do during a recession.

#1 Plan for everything

In most situations, the best offense is a good defense. The same holds true for recessions.

Surviving a recession starts with good planning, both before the recession begins and during the economic slump. In short, planning enables you to defend against the unexpected.

Developing a business strategy and planning for an economic recession typically includes the following:

• Economic forecasts – Take a look at your past profit flow. How much did you earn month over month? Year over year? Once you have collected the information about what your past has accomplished, it can be easier to predict the future. When creating your forecasts, consult previous recessions. Take a look at how recessions impacted businesses in your industry and make conservative predictions based on what’s already come to pass. 
• Plan As, Bs, and Cs – Creating multiple business plans is one of the best ways to plan for a recession. To this extent, each business plan should detail what would happen if any number of scenarios occurred. For instance, one plan might focus on what would happen if your business lost a sizable percentage of its customer base. Another plan might discuss what would happen to the business following layoffs.
• Cash reserves – There’s a good chance your business will lose money during a recession. By planning for these losses with cash reserves, you can ensure the economic hit won’t be as dire.

In addition to the above, planning for a recession also means lining up:

• Emergency investors
• Extra lines of credit
• “Rainy day” funds

#2 Review your business

If planning allows you to prepare for the future, reviewing your business allows you to make immediate changes. These changes can help you potentially weather the storm.

As you review the ins and outs of your business, note the following:

• Your business’s organizational structure – Are you a partnership? An LLC? A sole proprietorship? Knowing your business’s organizational structure will help you adapt to economic downturns as recessions hit different organizational structures differently.
• Your margins and profits – If your business sells multiple products, knowing which products make the most money will help you better survive recessions. Should the need arise, you can easily pivot your operation to only produce the products that generate the most revenue.
• Your operating costs – How much does it cost to run your business? Are there any expenses you can cut should the need arise? Answering these questions will allow you to make changes before a recession forces your hand.
• Your employees – Nobody wants to see their employees go. However, sometimes recessions force businesses to shrink. By taking account of your employees early, you will be better prepared to offer laid-off employees severance packages should layoffs occur.

Every small business owner should know this information regardless of the economy’s strength. However, it’s doubly important to have this information on hand when a recession is looming.

#3 Forecast cash flows early and often

Although forecasting cash flows is a component of strategic planning, it’s so important that it demands its own run-down.

In short, forecasting cash flow involves using models to predict how much money a business will take in versus expend over a designated period. 

Forecasting cash flows is especially crucial for small businesses looking to survive a recession. That’s because these models can give rough estimates of where these businesses will financially stand when the recession is in full swing.

There are two methods to forecast cash flow:

• Direct (short-term) method – The direct method is ideal for businesses concerned with their immediate financial needs. This method involves analyzing cash inflow versus outflow by looking at payments and cash receipts.
• Indirect (long-term) method – This method isn’t concerned so much with the business’s immediate needs, but rather its long-term goals. To calculate cash flow using this method, pore over past and present income statements, the company’s liquidity, and large-scale capital movements.

Whichever method you choose, running cash flow forecasts early and often will help you keep track of your money.

#4 Avoid accepting credit when possible

In most economic situations, buying and selling on credit can help boost small businesses. However, during a recession, relying on credit can destabilize a small business for two reasons:

1. If you’re buying on credit, you might not have the most accurate financial information for cash flow forecasting purposes. You might also not have enough money to pay back vendors.
2. If you’re selling on credit, your existing customers may not be able to pay you back during a recession. After all, the recession is likely pinching their wallets, as well.

Whenever possible, try to limit selling on credit. That way you’ll always have an accurate accounting of cash inflow and outflow. If you do have to buy and sell on credit, be sure to keep records of who you owe and who owes you.

#5 Don’t be afraid to pivot

If your forecasts predict that your current business model likely won’t survive a recession, you might have to pivot your business.

In short, a pivot refers to a business reorganizing its operating model due to changing market forces. When a business pivots, it typically does one or all of the following:

• Sells new, recession-proof products
• Changes its organizational structure
• Rebrands
• Redefines how it does business

For example, during the Covid-19 pandemic, many restaurants switched their business model from traditional “sit-down” style restaurants to take-out only. This pivot allowed them to cut operating expenses while staying afloat during the economic downturn.

Some small businesses even pivoted to entirely new products. Take Misadventure & Company Distillery, for example. Based in Vista, California, Misadventure & Company began making hand sanitizer to help bolster lagging vodka sales.

#6 Lean on your community

During recessions, it’s important for communities to stick together. That way local businesses and customers can help keep your doors open. You can also support your community by providing time, energy, and money to those in need.

Leaning on your community can help your small business in the following ways:

• Customers know to support your business
• Your reputation can increase
• You can help other businesses survive the recession

Asheville’s Town and Mountain Realty is a small business that knows how important it is to stick together during economic downturns. 

By contributing to charitable initiatives like Habitat for Humanity, Town and Mountain Realty shows the community they care. As a result, the community will likely be willing to support them during a recession.

Wondering how to reach out to your community? Start with Nextdoor. 

By claiming a Nextdoor Business Page, you can create an online presence, introduce your business, and connect directly with your customers. And more connections mean more customers spending money at your business to help get you through the recession.

#7 Cut out extra expenses

Some expenditures, such as payroll, are vital to a business. Others are extra that do nothing but siphon a business’s income.

If you’re wondering, “how can a small business survive an economic crisis,” start by looking at these extra expenses. The most common expenses that can be cut during a recession include:

• Lunch expenses
• Travel expenses
• Company retreats
• Extra office supplies

If your business can operate remotely, moving out of your physical space can also help you save money on rent and utilities.

#8 Increase customer service

Although cutting out extra expenses can save you money during a recession, one thing you don’t want to skimp on is customer service. In fact, you want to increase your customer service if possible.

That’s because a recession doesn’t just impact your business; it also impacts your customers. 

If a customer is feeling the effects of the recession financially, they might decide to cut you out of their budget. As a result, it’s up to you to retain them.

To increase your customer service during a recession, do the following:

• Be as open as possible – Good communication with your customers is always important. During economic downturns, it’s essential. For instance, if you need to raise prices, tell your customers what the new prices will be and why you need to raise them. This increases the chances they’ll understand the reasons for the price changes.
• Be more flexible with policies – Although you should never compromise your standards, being more flexible with business policies may help you retain cash-strapped customers. For example, consider amending your “return policy” to make it more customer-friendly.

Be recession-ready with Nextdoor

Economists sometimes predict recessions years in advance. Others arrive quicker than summer storms.

In either case, knowing what to do in a recession can often be the difference between weathering the storm and closing your doors for good.

The most important thing to know? How to connect with your local community.

With Nextdoor, you can connect with your local community like never before. You can retain your loyal customers and market to new ones simply by creating a Business Page.

Sign up for free today and let Nextdoor help you weather the next recession.

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Additional sources:

ALA Policy Perspectives. Open to Change Libraries Catalyze Small Business Adaption to COVID-19. https://www.ala.org/advocacy/sites/ala.org.advocacy/files/content/Workforce/LBB_PP%20-%20final.pdf

Forbes. What Businesses Can Do To Prepare For A Recession. https://www.forbes.com/sites/theyec/2019/03/08/what-businesses-can-do-to-prepare-for-a-recession/?sh=4cb6297c7b29

WallStreetMojo. Forecasting Cash Flow. https://www.wallstreetmojo.com/forecasting-cash-flow/