How to protect your small business in a recession

Are you looking to recession-proof your small business? Although no two recessions are the same, there is a tried-and-true playbook businesses have used to navigate and grow through downturns in the past. When preparing your small business for a recession, consider the following best practices to build a recession-proof small business.

How does a recession affect small businesses?

The effects of a recession on small businesses vary by industry. However, there are general characteristics you should plan for in every downturn.

Lenders become risk-averse.

Lenders are generally risk averse during regular times, but recessions make banks even less willing to loan money to small businesses.

Equity investors become pickier.

Recessions hurt portfolios, leaving them less money for new investments. As a result, economic downturns make investors selective.

Demand softens or shifts.

Recessions impact demand differently in each industry. For example, during Covid-19, there was a catastrophic reduction in brick-and-mortar retail demand but massive growth in e-commerce sales.

Competition changes

Your competition’s response to economic downturns will affect your small business. Some competitive changes like discounted pricing will hurt your business. On the other hand, some of your competitors may fold or reduce operations, thus helping your business.

How can a small business be recession-proof?

There is no magic playbook that will work for every business in every recession. However, there are best practices deployed over decades proven to help recession-proof small businesses.

Keep an eye on your markets.

The best recession-proof small business ideas involve agility in the marketplace.

A recession-proof small business MUST monitor “top of the funnel” KPI trends like website visits, warm leads contacted, or inbound calls. Maintain intimate customer relationships and listen for clues. Keep in touch with other industry professionals and compare notes to broaden your perspective on market trends.

Shift sales and operations resources toward strong markets. You may need to adapt your product or service offering to match shifting customer needs. Keep an eye on your competition and consider how to tweak pricing, bundling/unbundling, contract length, and other parameters to maintain or grow volume.

Eliminate capital risk

Cash is king during the downturn. The cheapest and most reliable source for cash is your operations, so strive to make your small business cash flow positive. If you are a venture-backed startup in a burn/raise cycle, do your best to delay equity rounds by deferring investments in R&D or new hires. If your company relies on debt financing for capital equipment or working capital, preparing your small business for a recession means securing debt capital in advance of the downturn.

Do not sabotage future growth.

During recessions, most companies avoid investing in growth (like hiring or expanding capacity) and instead focus on boosting cash flow through operational efficiency investments. But focusing only on cash flow is short-term thinking and can hurt the company’s growth coming out of the downturn. Find investments that both boost cash flow and create a foundation for scale, like process automation, standardization, or reliability improvements.

Use an operating forecast frequently.

You need an operating forecast to make fast decisions confidently. These critical financial models allow for rapid evaluation of alternatives and resource planning. If your operating forecast cannot run several scenarios efficiently and quickly, consider investing in a more versatile model.

How to grow during a recession

The fast-changing conditions of an economic recession create opportunities for agile and creative small businesses. Here are three business strategies during a recession to grow your company.

Pivot toward growing markets

Invest in growing markets to boost revenues. During the Covid downturn, vodka distillers found new markets selling their products as hand sanitizers. Just as significantly, they pivoted out of these markets when they became saturated and prices fell.

Hire away from competitors

Economic recessions are great times to hire talent, especially if you take them away from your competitors. Use the weaker labor markets to secure good talent at affordable rates.

Buy a business

Downturns are opportunities to find bargain business acquisitions. A small business acquisition will qualify for SBA funding, one of the few sources of capital that remain robust during recessions. Take advantage of this unique capital source to grow through acquisition.

Work with a team

The best recession-proof small business ideas come from collaborating with a great team. Yours should include a financial professional to project economic outcomes, avoid financial risks and strategic blunders.

If you would like to talk to a CFO about your recession planning, contact us for a free consultation.

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