pic of a sign that says Recession Ahead

Preparing Your Small Business For Recession

While none of us know for sure, the signs and predictions from those in the know are that the western economies are headed for a recession. Whether that means “winter is coming” for your small business or it will just be a relatively painless, short-term slowdown is anyone’s guess and not something that I’m prepared to predict.

There are several things that one should be doing to prepare, and the good news is that these are things that a savvy small business owner should be doing anyway, recession or not. My book, The Small Business Operator’s Manual – A practical guide to running your small business profitably, outlines many of these in more detail.

Shore Up Customer Relationships

Losing a good customer is always somewhat painful, but to do so now could have agonizing repercussions. Spend extra time ensuring that your most valuable customer relationships are solid. Make sure your salesforce knows they’re expected to have more face time, and that any customer issues are to be brought to management’s attention promptly. If it’s been some time since you, the owner has spent serious time on the road, visiting customers, today is the day to start.

And if you’ve been carrying customers that are not profitable, or are barely so, maybe now is the time to cut them loose. Note that you don’t fire customers by actually firing them. You do it by raising their prices to the point that you are happy with the revenue for the amount of resources they’re consuming. If they stay, at least now they’re worth the trouble. If they go, you’ve not lost much 0f value.

Get Ruthless About Collections

Too many small business owners don’t know how or won’t do the work to make sure that they are paid on time. Now is the time to fix that. Anything that can be done to preserve cash flow from this point forward should be on the table, but this should be near the top of the list. Doing regular collection calls, beginning before the due date of the invoice, and following up any stragglers quickly is one of the highest payoff moves you can make if you’re trying to reduce your average collection period.

Take a Razor to Unnecessary Expenditures

It’s always a good time to review where the money is going out. Don’t wait for a recession to decide to cut costs and trim the fat. Do it now. This applies especially to recurring costs like subscriptions. It’s often surprising how much we’re spending on online services, magazines, and other services (coffee, cleaning, etc.) many of which were a great idea at the time, but since forgotten, or at least no longer as critical as they once were. You can always re-up some of these when business improves and provided that they are really needed.

Create a Cash Flow Budget

It surprises me how many clients have no budget at all, and don’t plan their cash flow. Not having a cash budget is like flying a plane without instruments, and sheets over the windshield. Unless your business is flush with cash and recession-proof, you’re playing with fire by not having a sharp eye on cash flow. If you’re going to have a shortfall, it’s much better to know that well in advance, so you can mitigate it or at least prepare for it by alerting suppliers that you might need more liberal terms, or preparing your personal life for a smaller salary.

I have always used a simple excel spreadsheet to track budgeted vs actual cash flow. If you’re not sure how to set one up, BDC has a template that you can download for free.

Carefully Consider Your Debt Situation

Picture of a person hauling a weight labeled "debt"
Source: incharge.org

Many of my clients have no meaningful amount of debt and have made that decision as a personal choice to reduce stress (with the added bonus that it’s literally impossible to go bankrupt if you have no debt). Others use it wisely, to manage short-term dips in available cash, or to finance short-term assets like inventory and receivables.

It might seem like a good time to pay down debt, but that’s going to depend on a few other factors. If the company has a bank line of credit or similar debt facility, it’s likely relatively cheap money and should not be paid down unless the company has lots of cash. In fact, you might look at expanding the available cash from these sources while business is still relatively good.

Higher-interest debt may be a candidate but again it’s important to balance the costs of the interest with the need to preserve cash. If in doubt, leave it alone.

The Bottom Line

While it is impossible to predict the future, it is important to take proactive steps to ensure your small business is ready for a potential recession.
I learned a long time ago that transparency with key partners and other stakeholders is vital to your long-term success. In a small business, a recession doesn’t need to be as painful as you may think.

Keep your employees, key suppliers, landlord, and any other stakeholders informed well ahead of any potential cash shortfalls, so that they can prepare for the worst, and your relationships will weather any short-term recessionary storms.

Taking the necessary steps now can help you prepare and protect your small business for any economic uncertainty ahead.

The Small Business Operator’s Manual – A practical guide to running your small business profitably” says more.