The US economy goes through ups and downs. Every five to seven years we have a recession, which typically lasts for a year or two, then we have a recovery, which is usually much longer. It isn’t a matter of “if we have a recession”; it’s a matter of when. So doesn’t it makes sense to prepare in advance, so when business slows down, you’re ready?
Even in the best of times, small businesses tend to fail at a higher rate than large businesses. But when the economy goes into a deep recession, small businesses tend to fail at roughly twice the rate of large businesses.
No business is completely recession proof, but here are a few things every business owner can do to make his or her business more resilient.
Debt and Cash
First and foremost, pay off as much debt as you possibly can when things are good. When the economy slows, banks (and investors) pull back. Banks impose more restrictions on new loans, call existing loans, and cancel or reduce credit lines. This happens at the same time your customers are spending less, demanding more, and paying slower. The inevitable result is a cash crunch, and small businesses usually get the worst of it.
As you reduce your business and personal debt, it’s a good idea to also build up your cash reserves. This is challenging for most businesses, since you need to use cash to pay off the debt. There really isn’t any magic number for how much cash you should have on hand, but we recommend building up a cash reserve of at least three months of expenses. Unfortunately most small businesses seem to operate with much tighter reserves, often less than a month’s expenses.
Build up as much credit as possible while the economy is riding high. Then when business slows down, if you are short of cash, you can still draw on your credit.
Another challenge is that banks now watch credit usage very carefully. If a small business has available credit but doesn’t use it, the bank will reduce it. The way around this is to use the credit even if you don’t need it. For example, suppose your business expenses average $250,000 a month and a bank offers you a $100,000 credit line. If you don’t need it now, you should still consider accepting the offer (as long as the terms are reasonable). Then, instead of using your cash to pay all your bills, use your credit line for some of them. Pay the balance back over a few months and then repeat the process. The bank will view you as a trustworthy customer, and will likely keep your line open. They may even offer to increase it. Then when you really need the credit, you will have it.
When the economy is strong and cash flow is good, fixed costs are rarely an issue. But when the economy slows and cash flow slows down, high fixed costs can quickly kill even the mightiest business.
Every business is different, but no matter what industry you are in, you can find ways to reduce fixed costs and lower risks. For example, you might be able to sublet out some of your office space, sell unused assets (furniture, equipment, land, buildings, supplies, etc.), lease equipment instead of buying it, etc.
Of course one of the largest fixed costs is labor. The standard corporate approach to downturns is to close plants and/or eliminate staff. If you own a small business, you have another option. Instead of laying people off, talk to your staff about reducing pay in the short term. If you treat your employees as human beings instead of fungible worker units you many find that they are willing to take a modest pay cut for a while to keep their jobs and help the company.
Many small businesses operate using a large number of software subscriptions (for accounting, marketing, inventory management, customer relationship management, document/contract management, etc.) Most of these subscriptions are fairly small, but they can add up over time. So every 6-12 months go through the list and see which ones you can cut back or even eliminate.
Make sure you have the right kinds of insurance and the right coverage levels. If a fire, a major snowstorm, or a flood occurs when things are good, you might be able to survive without insurance. But if business slows down AND you get hit by a natural or man-made disaster, your odds of surviving drop dramatically. Beyond the usual coverages, be sure you have key man insurance, business interruption insurance, and some form of Internet insurance (in the event of a malware attack, etc.)
Many successful small businesses get their start with one major client, one product, one market, etc. This is fine when the economy is doing well. But in a recession such over-concentration can be deadly. Look for ways to diversify across products, services, revenue streams, customers, market segments, or geographical areas. A gym with three different customer segments is more resilient than a gym with just one. A restaurant group with five locations and different price points is much more resilient than a restaurant with just one location.
Stop worrying about the next economic downturn; prepare for it now. You’ll sleep a lot better.
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