How To Prepare Your Small Business For A Recession

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. 

1. Shore up cash reserves

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. 

2. Pressure-test your finances

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:

  • can you pay off a credit card balance to avoid the interest expense?
  • Can you bring some work in house and no longer pay subcontractors?
  • Can you pay for that essential app subscription for the year and save over monthly payments? 
  • Call your bank and cell phone provider to make sure you are on the right plan and getting the best rates possible.
  • Automate where possible: this reduces time and costs; utilize and invest in tech that will make this possible.  Bonus: by saving yourself and your team some time, you can then invest that time in value-added activities to reduce outsourcing or grow your business.

3. Build Alternative Revenue Streams:

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:

  • Build and launch that digital course you’ve been dreaming about
  • Pitch your speaking services
  • Look at your existing client base and determine if there are new services that you can pitch to them
  • Restructure the services you offer into bundles or packages that are consistent across all of your clients.  This provides clients better value and provides your business with streamlined services to deliver, improving efficiency.
  • Introduce group services, as people tighten their purse straps they might be looking for less expensive alternatives to your services.  Offering group services can open up a new client base without sacrificing your revenue.

The bottom line

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. 

 


Interested in learning more from us?   Follow along with us through our social media accounts (find us on Instagram @growcpa) and sign up for our newsletter for more educational and fun financial content. 

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. 

 

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