Over the course of just a few short weeks this past September, news about the overall health of the economy was extremely confusing. Just before Labor Day, for instance, the federal government's jobs report found that the U.S. economy created over 315,000 jobs in August – surpassing what most economists had expected. But there was little celebration of what most considered a positive jobs report. Indeed, a report about stubbornly high inflation a little over a week later sent the Dow Jones Industrial Average down by nearly 1300 points.
2022 has been a year of uncertainty and debate about the health and prospects for the macro economy. Among the most contentious arguments is around whether or not the economy has entered or is soon-to-enter a recession. While gross domestic product (GDP) did shrink two quarters in a row – typically a metric indicating a recession – plenty of experts argue we have not actually entered a recession and won’t anytime soon.
Planning for a Recession
In many ways, debates among economists about what constitutes a recession are of little use to small business owners. This is particularly true for the record number of new business owners who chose to launch companies in the wake of job losses, the Great Resignation and a rapidly evolving economy.
For these new business owners (and for any small business, really) prepping early for the inevitability of an economic downturn is an important part of building a company that can last. In fact, taking the time to plan for a recession – which, on average, last about 10 months – can also deliver more immediate business benefits, even when the economy is robust.
For example, consider the short and long-term benefits of these recession-proofing steps:
- Scrutinize and cut unnecessary expenses - It’s common for business owners to slash costs when demand slackens. Far better is to proactively evaluate business expenses to find those that aren’t delivering the value you need. Reducing costs in advance of a recession can both make your business more profitable in the short-term but also avoid a scenario where you are overreacting and cutting costs that will only harm your business in an economic downturn.
- Pay down debt - Starting and growing a business almost always requires taking on debt. The best time to pay down debt is when times are good and revenues are flowing in. When a recession hits, revenues fall and cash flow is tight. Not having to service large amounts of debt can give your company the cash flow flexibility it needs to weather a downturn.
- Have an emergency fund - The same advice financial advisors provide to families and individuals about having an emergency fund to cover at least six months of expenses also applies to small businesses. This will allow you to continue paying bills and salaries when sales drop and buy time for the economy to rebound.
- Explore new revenue sources - Diversifying what you sell becomes more important when a recession threatens your core business. This doesn’t mean straying far from what your company does well. Rather, think about adjacent products and services you can provide existing customers or use to attract new ones. For instance, a roofing company can transition to installing solar panels with the right training.
- Expand employee skills - Taking advantage of new revenue generating opportunities often requires expanding the skills of your employees. This is best done before a recession hits.
Succeeding During a Recession
Taking the time to proactively prepare your business for a recession is essential. But what makes planning valuable is when you actually execute on that well-crafted plan. This is harder than it seems. While planning for a recession can seem abstract before one begins, the economic challenges it brings are emotional and require difficult decisions.
One strategy for successfully navigating a recession is to evaluate your ideas for generating new revenue to see if any are particularly attractive during economic downturns. In other words, ask yourself whether the skills and products you currently offer (or could realistically offer) are always in demand.
There are a wide array of products and services that customers can’t do without, regardless of economic circumstances. For example, people can’t give up groceries or medical attention and taxes have to be filed no matter what. This means that the services of accountants and financial advisors, doctors and nurses and food retailers are evergreen. Demand for bargain products and helping homeowners complete DIY projects is also brisk during hard economic times.
Obviously, not all businesses will be able to pivot to provide new products and services. But having a flexible business model that can adapt to consumer demand is something all small business owners should strive for in order to make it through a recession.