How To Prepare Your Small Business For Recession

There’s been so much talk lately about recessions and uncertain times that I wanted to write a bit about the things you can implement in your business to prepare. Recessions are something we will all experience if we are in business long enough. With the proper preparations, the hope is that your business can weather the storm in the meantime. 

So, how do you survive (or thrive!) in uncertain times?

Start building your cash reserves

You’re probably sick of me saying this, but it's worth repeating because it's the most important thing you can do for your business. You most likely have an emergency fund for your personal life, so why wouldn’t you for your business? Those businesses that survived the last recession and the shutdowns that came with COVID were the ones that had cash reserves in place that allowed them to cover expenses and keep staff, while they were deciding what action needed to be taken to protect their future. They were looking at pivoting and alternative revenue streams, instead of focusing on how to make ends meet.

So how much should you hold in cash reserves? That depends on your business and your industry. If you are a service based online business, you likely have very low overheads. If you are a product business, you likely have higher fixed costs and longer lead times in your sales cycle.

Normally, I recommend between 3-6 months worth of business expenses (including your own salary) held as a cash balance in your business. Take a look at your fixed costs (those costs that you would have regardless of whether you make any sales or not). Next look at your fluctuating costs, eg. contractors, ad spend etc. Work out your average outgoings per month and start building towards your 3-6 month reserve.

Yes, it will be difficult! But start! It will all add up over time and any cash buffer is better than none if you have a lean month in terms of sales.

Pressure test your finances

This is where your great bookkeeping skills and routine will come into play! In this step, we want to pressure test your business for the last 12 months to see how it would have performed in a recession.

Ask yourself these questions:

What would happen if the business earned 20% less in sales?

This will tell you if the business can still remain profitable even with a substantial drop in sales. You need to prepare for the fact that your clients and customers spending patterns are changing as they have less disposable income (likely because they are building their own cash reserves!) If your business is already running on tight profit margins, even a small change in sales can result in a loss for your business. If your business is running with healthy profit margins, you’ll be in a better position to weather changing trading conditions.

What would happen if your expenses went up by 10%?

Most likely this has already happened to your business! Do you know how that has affected your profit margins? Keep a close eye on all of your costs, and use the Stop, Swop and Streamline method to make changes to your costs and overheads where you need to.

Having a good handle on your outgoings will also help you to determine whether you should be increasing your own fees or prices.

Build alternative revenue streams

At any time, it’s a good idea to diversify your income streams. This is especially true during a recession as it will help your business in the long run.

This is the time to think about how you can make more sales and get proactive about it. Think about:

Your existing client/customer base

Do they know about all of the ways to work with you or purchase from you? It is quite possible that they might not be aware of additional ways you can help them. Communicate this with them regularly.

Are there new offerings you can bring out for your clients or customers? You already have so much information on their likes and dislikes, their needs and pain points, could you create something new for them to support them even more than you currently do.

How did your existing clients/customers find you and how did they buy from you? Having this information can focus your attention in gaining new clients.

Potential new clients/customers

Is there a change you can make to your marketing so that you can attract a new type of client/customer or new niche? Doing this allows you to focus on attracting new clients, rather than on creating new offers, something that can be quite time consuming. Adjusting your marketing strategy can reap quicker results in terms of cash flow! What channels can you use to get more visibility for your business?

Lastly, it’s not a question of if but when a recession hits. They are an inevitable part of doing business. Being proactive means protecting your resources (your reputation, your time, your team and your cash reserves) during the good months so you are prepared for the quieter ones.

If you need any assistance with this, feel free to reach out to me to chat on how I can help!