If your business survived all the challenges created by the pandemic, you may feel you deserve a well-earned “breather” to enjoy your accomplishment. Unfortunately, there’s another potential challenge coming your way if predictions of a recession hold true.
As you may know, a recession is defined as two consecutive quarters of negative economic growth. Demand and revenue may fall as uncertainty about the future increases, and in some cases, a recession can cause small businesses without adequate support to be unable to continue operating. However, research shows there are ways to mitigate the damage; many businesses show remarkable flexibility and find creative ways to survive a downturn.
Small businesses that have not adequately prepared for a recession may not make it to the other side, especially when that’s combined with budget constraints and reduced spending power. The four major challenges to overcome during a recession are:
- Reduced cash flow. When customers delay purchases or payments for longer than usual, a common occurrence during a recession, a domino effect ensues, as businesses may be unable to pay vendors in a timely fashion.
- Loss of demand. If customers are buying less or not buying at all, another common behavior in times of recession, businesses may lose significant income—especially those dependent on a few major customers—and even be stuck with unsellable inventory.
- Staffing reductions. Less revenue coming in can lead to budget cuts, and reducing staff is a common response to a recession—even though having fewer employees lessens the chance to generate income as remaining staff may become demoralized or overworked.
- Marketing constraints. Marketing is often the first thing cut when companies face budget constraints, and while there may be no short-term consequences, the long-term effect of not bringing in new customers can be detrimental.
Research has shown the difference between businesses that fared poorly during recessions and those that recovered quickly and even flourished is preparation. Three things experts recommend are:
- Focus on decision-making. Organizational structure may have something to do with how companies come through a recession; those that are centralized may be in a better position to make tough decisions, while decentralized companies are often better positioned to weather macro shocks since they’re privy to more local information and more able to match decisions with expertise.
- Look beyond layoffs. Companies that emerged strongest from the Great Recession relied less on layoffs and more on operational improvements; many employed hour reductions, furloughs and performance pay rather than cutting jobs.
- Invest in technology. Prioritizing digital transformation either before or during a downturn can provide companies with improved analytics to better understand the business, how the recession is affecting it and where there’s potential for operational improvements—and having digital technology can also help cut costs.
Additionally, while consumer demand decreases and selective spending on only necessary items becomes a priority, businesses can become flexible to changing consumer preferences. Key areas may include:
- Product or service quality—Refine the quality of your product.
- Customer service—Focus on customer satisfaction.
- Be flexible—If you do get a big client/order, you should be ready to handle it.
If a recession is imminent, be ready for it so your business is one of the ones that survives and even thrives in the face of adversity. You may want to consider beefing up your technology or making other operational changes to prepare for the coming challenges. A working capital loan, small business loan or equipment financing can be part of an excellent strategy to ensure your business makes it through a recession unscathed. Unlike traditional lenders like banks, whose application and approval processes can be cumbersome and often end with a “no,” alternative lenders are in your corner and focused on helping you make your business dreams come true.
If you have any questions about preparing your business for a recession, give Clear Skies Capital a call at 800-230-9822. You may be pleasantly surprised at what you qualify for.