How to protect your small business from a recession

How to protect your small business from a recession

As we all continue to navigate the COVID-19 crisis, it makes sense to think about the future and what it might bring. The economy never stands still and, like business, either grows or shrinks. There will certainly be boom and recession times in the future. It makes sense to think about how you could deal with future economic changes while the current crisis is still ongoing in many respects.

How to protect your small business from a recession

How to protect your business from a recession

With a little planning, you can prepare your business for future downturns and market changes so that you are as prepared as possible for what is bound to happen. Here are nine ways you can proactively protect your business from a recession.

1. Write a business plan

The foundation of any contingency planning is to start with a good baseline plan that anticipates your best guesses about how things will go in the future. Don’t worry, now is not the time to try to predict future downturns. Instead, this plan should be for the status quo. It should predict the growth you are planning, excluding any unforeseen changes in the economy.

A complete, written business plan is not required for this part of your preparation. Just focus on creating a financial projection that includes P&L, cash flow, and a balance sheet. Ideally, make sure your forecast is fully interconnected so that changes in your income in your P&L automatically affect your other financial statements. At this point, a forecasting tool may come in handy.

You should also document your business strategy in a simple format using a one page business plan.

2. Experiment with different scenarios

With a financial forecast, you can experiment with different financial scenarios to see what will happen to your cash and earnings in different situations. You should experiment with slowing down your entire business as well as slowing down individual revenue streams. In each scenario, explore how you can respond to a drop in income by anticipating cost cuts.

What expenses can you easily cut? What expenses are needed to keep the doors open? Working through different scenarios will help you think about the changes you might need to make to your business to keep it afloat.

3. Focus on cash flow

As you experiment with different financial scenarios, keep an eye on what happens to your cash flow. Are you able to keep enough cash in the bank in different situations? What changes do you need to make to your financial projections to keep your cash flow stable? This is where it is very useful to have interconnected financial forecasts so that changes in one part of your forecast are automatically reflected everywhere.
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In addition to experimenting with hypothetical cash flow scenarios, it’s helpful to focus on your current, real cash flow and develop good habits while things are going well. Take the time to make sure your customers pay you on time and put in place systems to control receivables. If possible, it can also be helpful to create a cash cushion.

3. Explore the line of credit

Creating a cash cushion or some sort of “rainy day fund” is not always easy for business. Most businesses spend most of their cash reinvesting in the business to fund additional growth. In this scenario, consider opening a business line of credit to use as a cash cushion. Ideally, you won’t use this line of credit unless you absolutely need it, and maintaining it will cost your business very little, only interest and fees when you take out a loan from her.

4. Link Marketing Spending to Revenue

A useful budgeting strategy is to link certain expenses to income. This means that instead of creating a specific budget for something like marketing, you instead project those costs as a percentage of revenue. Using this method, you can control costs if sales start to decline, or automatically increase your budget if sales are higher than expected.

You can use this tactic for more than just marketing. Many variable expenses (as opposed to “fixed expenses” such as rent) can be linked to income to make budgeting more automated.

5. Set up a review cycle

Even if you’ve taken the time to complete all of the above steps and have a solid financial forecast with various scenarios, it won’t help much if you don’t review your plan regularly and track your progress against it.

The best way to do this is to use the Financial Reporting Dashboard so you can easily create reports and see if you’re meeting your sales goals and sticking to your spending budget. Schedule a monthly review meeting to review your numbers and then adjust your forecast based on how your business is performing.

During a financial crisis, or anytime there is significant change and uncertainty in your business, you should increase this review cycle and review your numbers more often. Like the other tips on this list, it’s best to implement these systems when things are going smoothly, so you don’t have to rack your brains to build a good reporting system when you have a lot of other things to do.

6. Consider different target markets

Diversification is a great strategy for dealing with downturns in your business. During the coronavirus crisis, for example, many high-end restaurants have entered the takeaway market and also switched to cheaper offerings, targeting a different customer base than they normally would.

Many restaurants have also begun offering meal kits and other family meal options. Interestingly, many of these restaurants have retained these new offerings after opening because the new lines of business have diversified their offerings and have actually expanded their revenue opportunities.

7. Explore Different Pricing Models

When you are looking at selling your products and services to other types of customers than you traditionally serve, you should also look into different pricing options. Different sales approaches can open up new business opportunities and make your products and services available to customers who can falter during times of uncertainty.

For example, you might consider renting products instead of selling them. You may want to explore selling smaller and cheaper versions of your service, or perhaps separate the services so that they are available on the menu. Another option that can reduce upfront costs for customers is a subscription model instead of a one-time purchase.

8. Build Strong Relationships

During an economic downturn, relationships are more important than ever. If you need to defer rent or delay payment to the seller a bit, it will be much easier if you have established a relationship of trust. As with some of the other tips, work on developing this relationship before the crisis hits so it’s easier to ask for favors when you need them.

Don’t forget customer relationships. Building strong relationships during good times will help keep them strong during difficult times. People are people after all, and they will work with companies they know and trust.

9. Be ready to pivot and diversify

While this may seem like the most obvious piece of advice, it’s worth noting anyway: you need to be prepared to take your business in a new direction if there are drastic economic changes. You may need to completely change your business and it’s worth considering.

However, thinking about moving into a new line of business doesn’t have to be an all-consuming effort. It’s just about brainstorming “what if” scenarios and thinking about new lines of business you could go into if the world were to suddenly change. If you’re a dry cleaner and you do makeovers, what would you do if people suddenly stopped wearing more formal clothes?

Maybe you could get into outdoor gear and equipment cleaning and repairs. If you run a business that creates yoga studio class scheduling software, what will you do if people stop going to yoga classes? Maybe you can create a tool that allows yoga teachers to stream their classes live.

Simplify Crisis Planning

Managing your business during a significant economic downturn or business climate change is stressful. There is no doubt about this. But you can make it easier for yourself by planning and using the right systems. Significant changes to your business are always difficult, but if you keep your head up and look for new opportunities, you will find that your business will survive and thrive.

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