Top Tips To Prepare Your Small Business For A Recession

A recession may be on the horizon. We all, of course, hope that it doesn’t happen, but the possibility exists. Indicators of the recession are there, with the GDP having contracted by an annualized rate of 1.6% in the first quarter of this year and .6% in the second quarter. The GDP did grow by 2.6% in the third quarter, however, so we’re not in a recession yet – with yet being the operative word. 

As a business owner, you have a choice – you can ride it out trying to do business as usual, or you can prepare your business to weather the storm.

Here we will provide ways that you can prepare your small business for a recession.

Protect Your Profit Margin

You’re already dealing with higher prices for inventory for your business, which is likely to continue if we go into a recession. While you don’t want to, you clearly have to pass on at least some of those extra costs to your customers. You have to calculate your markup percentage that will keep you at a profit margin that will keep your doors open. 

When doing so, you’re walking a fine line. You have to come up with a price that will keep customers buying but not put you out of business.

Go Lean

As consumers cut back, businesses must do the same. You need to analyze your costs across the board to see what you can reduce or cut. This may involve increasing your process efficiencies, which can cut a variety of costs, including labor costs. 

A thorough examination of all your costs should enable you to find costs to trim. You can even shop for less expensive vendors or service providers.

You should do your analysis and take cost-cutting measures now. Don’t wait for the recession to hit.

Manage Your Cash

You’re going to need to have enough cash on hand to meet your obligations, so you need to effectively manage your cash flow. The goal is to have as much cash on hand as possible at any given time. You can do this by:

  • Speeding up the collection of accounts receivable.
  • Negotiating favorable terms on accounts payable. You want to delay paying accounts payable as long as possible without incurring penalties.
  • Managing your inventory.

Managing inventory is the most effective way to increase your cash on hand. Holding inventory means less cash in your pocket, so you need to find the optimal inventory level that allows you to fulfill orders but not have excess. 

Build Your Cash Reserves

Once you cut your costs and improve your cash management process, you should build up your cash reserves. You can even consider other ways to put cash aside by reducing your owner distributions, dividends, or salary.

A nest egg of reserves can give you much peace of mind when times get tough.

Focus on Customer Retention

You never want to lose customers, but during a recession, you can’t afford to. You need to ensure that your customers are having the best experience with your company possible. Your customer service and order fulfillment need to be outstanding to help keep the loyalty of your customers.

It’s also a great time to start a rewards program if you don’t have one. According to a study by BOND, done in partnership with Visa, 71% of Americans say that loyalty programs are a meaningful part of their brand relationships.

Many softwares and apps are on the market that enable you to simply set up a rewards program that is customized for your business needs.

Consider a Line of Credit

The best way to look at getting a business line of credit is for a “just in case” scenario. If cash gets too tight during the recession, a line of credit can help you meet your other obligations. You just have to be careful not to overextend your business. 

Lines of credit are intended for short-term cash flow needs, so if you use it, pay it off as soon as it’s feasible.

Put Together a Marketing Plan

You’ll still need to market your business during the recession to maintain your brand recognition and bring in new customers, but you should consider using a different approach. During difficult times, people are looking for compassion, so your marketing should have a compassionate tone. 

You could consider doing campaigns that say, “we’re with you” or “we’re here with you” in some way. You can do this in conjunction with discount offers or with advertising your rewards program. 

When developing your marketing plan, you’ll need to, of course, consider costs. Make affordable or free marketing techniques, such as social media, the bulk of your plan.

Diversify Your Revenue Streams

It could be the perfect time to look for new opportunities to diversify your products or services or to add other revenue streams. How you do this depends on the nature of your business. If you have technologies or relationships that you can leverage to create more revenue without increasing expenses, consider doing it now. Offering some sort of subscription service related to your business is another option.

The more ways that you can bring in revenue, the more recession-resistant your business will be. All your eggs won’t be in one basket, so to speak.

In Closing

Let’s keep hoping a recession won’t happen, but you should still do what you can to get your business prepared for the worst. The time to start is now, or you may find yourself scrambling to keep your business alive. Use the tips provided to create a strategy and implement the strategy as quickly as you can. A well-developed and executed plan can help your business continue to be successful during a recession and for many years to come.

Above all – don’t fear the worst happening. If we do have a recession, it – like all things – shall pass. 


Rylie Holt