Getting Prepared in the Event of a Recession

Nobody likes to think about an economic downturn. We all want to hope that the economic outlook will remain rosy, but recessions are a reality that can’t be ignored.

The best time to think about a recession is before it happens. For small business owners and managers, there are a number of key steps to take in order to protect your organization in the event of an economic downturn. Take the time to assess your business strategies and make any adjustments necessary to make sure you’re prepared to weather the storm of a recession, if and when it arises.

Firstly, take a look at the following tips for getting prepared prior to an economic downturn:

  1. Put some cash aside in a “rainy day” fund – It’s important to have some accessible savings set aside for an emergency—especially in the event of a recession. Keep some cash on hand in the event of an emergency or in order to cover bills if the economy turns down.
  2. Secure access to flexible credit – The best time to apply for a line of credit is when the economy is strong. Even if you don’t need it at the moment, consider applying for and securing financing that you can draw upon when times are tough. Access to cash when you need it is key.
  3. Explore new sources of revenue – Evaluate your operations and consider what new products or services you could offer to your current clients. By diversifying your revenue sources, you can both add new clients and earn more from your current base.
  4. Evaluate your business partners – Take some time to evaluate and consider the strength of your partners and vendors. Are they vulnerable to economic downturns? You might think that your business is on solid footing, but outside factors can have a big impact on your operations. Consider seeking out strong partners who are equally prepared for the impact of a potential recession.
  5. Carefully consider any investments – The timing of investments is key. Something that might be a fantastic investment during a time of economic strength could break your business during a recession. Any time you are considering an investment, make sure you evaluate if your business can bear the financial burden in the face of an economic downturn.
  6. Put some thought into your hiring practices – Before you hire new employees, make sure to consider the state of the economy. If a recession hits and you end up needing to lay off workers, this can have a big negative impact on both your company’s external reputation and its internal culture and morale. Be sure to hire within your means.
  7. Understand the tax implications of a recession – Be sure to meet with your accounting advisor to understand what the future might look like in the event of a recession. Work with him or her to develop a solid tax plan. Consider asking your accounting advisor for advice on establishing solid footing prior to a recession. Pick their brain about any of the above topics—they’ve seen it all.

Now that you’re thoroughly prepared for a recession to hit, let’s examine some tips for what to do once it does, inevitably, arrive:

  1. Evaluate your accounts receivable – As mentioned above, accessible cash is a big issue during a recession. Take a look at your accounts receivable and be strict about holding clients to the payment schedules laid out in their contracts. If need be, re-write or retool your future policies to allow for more cash flowing in.
  2. Pay close attention to forecasting – Regularly examine short-, medium-, and long-term forecasts of the economic environment, then adjust your strategies accordingly. This is another place where regularly being in contact with your accounting advisor is very helpful.
  3. Draw on the resources you established prior to the recession – Don’t be scared to use your cash reserves or draw on the line of credit you established during the economic growth period. After all, that’s why you created these accounts. Obviously don’t be reckless with your spending, but don’t be afraid to use the resources that you established for yourself.
  4. Honestly evaluate your budget – Consider how you are spending money in the different areas of your operations. Require that all expenses and investments be justified in order to remain in the budget. This isn’t easy—be prepared to make hard choices. Draw on the collective knowledge of your staff by holding brainstorming sessions to search for ways to make your operations more efficient.
  5. Redouble your efforts to build strong relationships – Renew your networking efforts, focusing particularly on your biggest, oldest, and most loyal customers. Give them special attention and treatment in order to increase their loyalty. Additionally, consider focusing some attention on key outside relationships, such as those with banks. Building and maintaining strong relationships can make a big difference how successfully you weather an economic downturn.
  6. Consider what you can acquire during a recession – This one is perhaps a bit counter intuitive. Assuming that you did a good job of preparing your business for the economic downturn, it’s possible that you will be on a strong enough footing to use the recession to your advantage. For example, you could draw on your cash reserves to acquire repossessed equipment at a deep discount. Alternatively, you could transfer extra cash to your marketing budget and increase your overall market share over competitors who cut their marketing efforts in the face of the recession.

Benjamin Franklin wrote that “by failing to prepare, you are preparing to fail.” This is certainly true when it comes to economic downturns. By following the advice above and consulting with your valued accounting advisor, you can gain a leg up on the competition. It is possible to build a strong enough footing to weather a recession—or even come out on top!