How to Prepare Your Small Business for a Recession

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How to Prepare Your Small Business for a Recession

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Owning a small business is no easy task — it takes a lot of hard work, dedication and resilience to make it succeed. And while we all hope that our businesses will thrive regardless of the economic conditions, there’s always the possibility that a recession could hit and cause some serious damage.

Times may be tough, but that doesn't mean your small business has to suffer. In fact, there are plenty of things you can do to prepare a business for a recession and make sure it stays afloat. Here are a few tips to get you started to recession-proof your business today.

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Preparing a Business for a Recession

As the economy shows signs of an impending recession, small businesses need to be proactive in order to weather the storm. According to Ben Johnston, small business expert and Chief Operating Officer (COO) of Kapitus, “nearly all businesses are cyclical and most follow the general expansion and contraction of the overall economy.” This means that you must always be prepared to ride the waves of the economy, which includes occasional downturns.

However, small businesses are often hardest hit by recessions. According to Brookings, small businesses accounted for 45 percent of employment prior to the 2008-2009 recession but then disproportionately accounted for 62 percent of the net job losses during the recession. This only highlights the importance of being prepared for potential economic crises. 

The good news is that there are a number of things you can do when preparing a business for a recession. And with a global economic decline on the horizon, it’s a good time to start working on strategies to recession-proof your business. 

How to Recession-Proof Your Business

In these uncertain times, it's more important than ever to make sure your business is ready for an economic downturn. In fact, in a Harvard Business Review analysis, prepared companies grew at a 17 percent compound annual growth rate after the recession in 2009 compared to their unprepared counterparts. 

Here are a few tips to help you prepare your business for the worst:

  • Diversify Your Revenue Streams. Don't rely on just one or two sources of income and try to think of ways to diversify your services or product lines. If one area of your business slows down, you'll still have other areas to fall back on. 
  • Build Up Your Cash Reserves. Having a cushion of cash on hand will help you weather any short-term dips in revenue. Levon L. Galstyan, a CPA associated with Oak View Law Group, recommends “keeping 6-12 months of operating expenses on hand to smoothly get through this difficult period.”
  • Stay Flexible. Be willing to change your products, services, or pricing if necessary. “During recessionary periods, customers become more price conscious, so it’s important for businesses to consider adjusting product offerings to fit changing customer tastes,” says Johnstone. If you're too rigid, you could end up being priced out of the market. 
  • Tighten Your Belt When Necessary. If revenue drops, don't be afraid to cut costs where possible. This will help you stay afloat until business picks up again. However, “it’s important not to compromise the integrity of your offerings, as this is a false economy which can damage the brand, image and profits long-term,” warns Henry Abenaim, CEO of Fundigo. Be smart about how you cut costs. 
  • Keep Marketing: Even in a recession, it's important to keep marketing and promoting your business. This will help maintain visibility and stay top of mind with potential customers. But, if you’re worried about your budget, there are plenty of ways to cut costs and still maintain a successful marketing strategy. 

Lower-Cost Marketing Strategies for Small Business Owners During a Recession

As a small business owner, you may be feeling the pinch of a potential looming recession and looking to cut costs where possible. However, marketing is an essential part of running a successful business, and you can't afford to skimp on it. 

There are some simple steps you can take to save money on your marketing without sacrificing results.

  1. Take a Close Look at Your Marketing Budget: There's no need to spend money on expensive advertising campaigns if they're not going to be effective. Instead, focus on cost-effective strategies like online marketing, repeat customers and word-of-mouth referrals.
  2. Get Creative with Your Marketing Efforts: There are plenty of free or low-cost marketing tools available, including social media apps, so there's no excuse for not being creative. Hold a contest, offer discounts or coupons, or create an interesting social media campaign with eye-catching video content.
  3. Develop a Unique Selling Proposition: Come up with a specific benefit that distinguishes your business or product from its competitors. This unique selling point should then be communicated through your marketing campaigns. “During a recession, consumers are pickier about where they spend their money. As a result, you'll have to work harder to gain their trust and convince them to invest in your product or service,” says Galstyan.
  4. Partner With Other Businesses: While you obviously want to stand out from your competitors, there’s no harm in combining your resources with other small businesses in tough times. “Local businesses can come together to promote other businesses and get promoted in return. If the partnership is compatible, it will also add authenticity,” suggests Kaitie Weaver, Head of Brand and Communications at Helcim
  5. Don't Be Afraid to Ask For Help: Many small businesses make the mistake of thinking they have to do everything themselves. However, there are plenty of professionals out there who can help you with your marketing efforts, and they may even be willing to work for reduced rates during a recession.

Common Mistakes From the 2008/2009 Recession and How You Can Avoid Them Today 

The 2008/2009 recession was a tough time for small businesses and many were forced to close their doors for good. However, there are lessons we can draw upon from the last recession so that small businesses won’t be as hard hit as they were.

One of the biggest mistakes from the 2008-09 recession was that small businesses often made hasty decisions without much thought about the bigger picture or long-term goal.

“Most businesses lacked a crisis management policy during the recession and thus made decisions based on the situation rather than evidence. Businesses hastily sent employees home before considering the possibility of keeping them because the recession would not last forever,” explains Galstyan. Try to keep a more level head in times of crisis and don’t be too quick to make major decisions without thinking about the future.

Similarly, it’s not a smart move to make risky decisions in uncertain times unless you’re sure of the outcome. “This means avoiding taking over the space next door while sales are declining, even if the landlord is offering a great deal, and staying away from large, long-term expenditures such as buying new equipment or launching a new product line unless there is a clear financial return and demonstrated demand,” recommends Johnston. In times of financial uncertainty, it’s better to be smart rather than risky.

Finally, small businesses should manage their debt in appropriate ways. “You should not comply with aggressive payment plans that faster deplete your company’s resources,” warns Galstyan. It’s ideal if you can hire an insolvency attorney or financial advisor to help you deal with debt during economic downturns. You can also try to negotiate with creditors to obtain more reasonable payment terms that you’re confident you can make. “Renegotiating credit terms before a recession is the best way to prepare your small business for when things get rough,” says Galstyan.

Staying Positive

While it’s impossible to completely insulate your business from the effects of a recession, there are steps you can take to help manage the storm and minimize the damage. The key is to be proactive and prepared in how you run your business, including being smarter with your expenses, utilizing lower-cost marketing strategies and making calculated decisions for longer-term gain.

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