There has been a lot of talk about a recession circulating in the media over the last year. Are we? Aren’t we? Will we be? The reality is that recessions are a normal part of the global economy. It’s a cyclical process. So at some point in your business's lifetime, a recession will cross your entrepreneurial path. That’s the bad news.
The good news is that, according to Forbes.com, since 1970 Canada, has experienced five recessions, averaging three to nine months in length. Putting the potential timing into perspective can help ease some of the fear and feelings of doom that are often associated with the topic of a recession. With the proper preparations, our hope is that your business can become equipped to weather the economic storm that is on the horizon.
So how do you stay the course during turbulent economic times? Read on.
This is the kind of advice your grandmother might give you, except we don’t recommend putting it under a mattress or hiding it in a loose floorboard. Just like you should have a personal emergency fund that can cover you for a few months when life happens, you should also have one for your business. How much? That depends. Businesses, like lifestyles, come in all shapes and sizes. One business might have very low overhead operating costs (like a digital marketing agency) and another may need thousands of dollars per month to sustain itself (like a restaurant).
We recommend having savings set aside that equate to 3-6 months of essential costs. So take a look at your fixed costs (those are costs that will not change if you lose a client, or contract or two). This would include your domain and email, necessary subscriptions, rent, cell phone, insurance, salaries and wages. The important point here is to start saving for a rainy day now and save as much as you can to extend your business runway if a recession hits.
This is where those of you with clean books will be able to really enjoy the benefits of that bookkeeping routine you have been keeping up with. A great way to prepare your business for a recession is to perform a budget pressure test. Look at your sales for the last 12 months and answer these questions:
What would happen if you earned 20% less in your business?
This will tell you whether you can maintain profitability if your sales were to quickly decline by up to 20%. Consumers across the country, and worldwide, are beginning to feel the impacts of inflation coupled with rising interest rates. Simply put, a dollar earned today is not equal to a dollar earned even 6 months ago. Our purchasing power has diminished due to inflation. If you’ve visited a grocery store lately, you can see this playing out in real time. Prepare for the reality that your potential customer may have less disposable income.
If you are running a tight-margin business you may be at risk of running a loss. If your business has some generous margin room, like a lot of digital products, you are in a better position to weather the storm.
What would happen if your expenses went up by 10%?
You’ve likely experienced an inflation-related price increase to your overhead costs, as few things, if any, can escape the impacts of inflation at this point.
Insurance costs are higher and so are subscriptions to digital tools and payment processors. It all adds up. Keeping a close eye on all your micro expenses and seeing if there are cheaper alternatives on the market is a good idea. This can take some time to research alternatives, but can be worth it if it saves your business hundreds of dollars per month.
Taking a look at these numbers will also help you make some pricing decisions. Perhaps you, too, need to raise your fees and prices in order to compensate for inflation.
Where can you cut costs?
When business is good we can start to spend generously on things we don’t necessarily need. The culture in our society has normalized this behaviour. When prepping for a recession, you will want to identify areas where you can cut costs.
Here are some potential ways to start cutting expenses:
A great way to de-risk your business not only during periods of economic downturn, but also for the long-run, is to find ways to diversify your income streams. This is the time to put on your creative hat and think outside the box. How can you drum up more business? What can you set up now that will help your business in the long run? Can you market yourself in a more creative way to attract new customers? Adopting a more proactive approach can make all the difference.
The following are some examples of alternative income streams that you may be able to implement in your business:
It’s not a question of if but when. Recessions are a normal part of the economy. Now is the time to take the necessary steps to prepare. This means consciously setting aside resources during good months to prepare for the inevitable lull. The best thing you can do to prepare your business for a recession is to operate with the assumption that sooner or later you will be affected by an economic downturn, and plan accordingly.
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Wishing you success in your business,
- Martina + Ashli
Date published: November 15, 2022
Disclaimer - The information provided in this blog is general in nature and solely for educational purposes. Readers use and implementation of the information comes at their own risk and is their own responsibility.