Updated: Sep 13, 2022
Every small business faces risks when the economy takes a dive. However, history teaches us that small businesses can survive and even flourish. Some companies that thrive the most have rigorous inventory, cash-flow, and debt-management policies in place and understand how to tap into emergency resources to ensure that their operations remain robust.
So the best way to survive a recession is to plan for it. The worst way is to wait until the economy tanks and then scramble to protect your business. Prepare for the worst-case scenario while having some contingency plans in place so that you're ready when things shift.
1. Assess your cash flow.
A major concern for small businesses is having enough cash to get by in a recession. The best way to alleviate this concern is to monitor your cash flow regularly. Be sure you know where your cash is coming from, where it's going, and how much money is going out each month versus coming in. If you're having trouble keeping up with bills, it might be time for some belt-tightening measures. Think about cutting back on marketing expenses or spending less on supplies. Then set up a budget with more conservative estimates. Lastly, save enough money in the bank so that if you have a slow month or two, you're not forced to make payroll or pay other bills late.
2. Keep your debts low.
It's important to manage debt carefully during an economic downturn because it can be challenging to pay off loans when fewer customers are paying their bills on time. If you have too much debt, it can cripple your business during times of economic slowdown or recession. Try to limit yourself to one or two major monthly payments and avoid taking out any loans unless necessary.
It's better to keep your debt level low, so you don't struggle under the weight of high-interest rates and monthly payments during a recession. If you have extra funds on hand—or if your business is growing—consider using them to pay off high-interest debt before it becomes even more expensive during a recession.
3. Stay flexible with inventory management.
When times are good, it's easy to order more products than you really need because you're not worried about paying for them immediately. But those extra items can quickly become a financial burden when the economy dives. Keep your inventory levels low, so you don't have too much product sitting around if sales start slowing down unexpectedly. It might be easier to have customers on a short and reasonable backorder so you don't get stuck with extra inventory you can't sell.
4. Diversify your customer base.
One of the best ways to protect yourself from one industry's downturn is by diversifying into other areas where demand doesn't fluctuate as much with economic changes. You can also tap into vertical markets to reach audiences you would typically not reach. A vertical market serves a specific niche with specific sets of needs. For example, if you sell pest control services but see fewer customers during hard times, consider adding lawn care services or landscaping work. While bringing on new customers, you can offer a referral or other incentives that can help boost sales without spending money on advertising campaigns.
5. Speaking of marketing campaigns…
It can be tempting during a recession to cut back on marketing budgets and advertising expenses, but this could be a mistake if it means losing customers who might otherwise have been loyal to your brand during good times and bad.
Watch what you spend on marketing. But keep marketing efforts going—even if it means offering discounts and promotions to bring in new customers who can help offset losses from existing customers who may be struggling more than ever because of their own economic situations.
6. Don't be afraid to downsize—when necessary.
If your business has suffered because of a downturn in sales or market conditions, consider cutting costs by downsizing staff or moving into smaller office space. You can also reduce overhead by outsourcing functions that don't directly contribute to your core mission or services—such as accounting, payroll, and human resources management to an outside firm or service provider.
7. Look at the big picture.
Understand the situation and the impact it will have on your business. To do this, you must look at the bigger picture, which means understanding how your industry affects other areas of the economy. Read up on projections, predictions, and potential outcomes. Leave no stone unturned.
8. Know what you can control and what you can't control.
It's important to know what is within your control and what isn't when making financial decisions for your company during difficult economic times. For instance, if you own an e-commerce store selling products with no inventory, then there isn't much you can do when it comes to controlling inventory management during tough times — other than increasing prices on some items or eliminating unprofitable ones until things get better (and perhaps even closing down temporarily). Do your best with what you have, and begin thinking creatively and outside the box.
9. Lean on your community and fellow entrepreneurs.
In times like these, it's crucial to find your support system. Lean on your friends, family, and your customers for ongoing support. Tap into your belief systems (if you have one) to keep you grounded and optimistic. Most importantly, connect with other entrepreneurs, see what they're doing, join organizations, offer your support, create a bartering system or collaborate on mutually beneficial projects.
While tough times often have a knack for striking when an entrepreneur's guard is down, with the right combination of preparation and planning, you can not only survive a recession but profit during one, too.