7 ways to prepare your business for a recession

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By preparing now, you can avoid a hard time later.

Key Point

• Recessions are common economic events and can last for years.
• There are ways to offset the negative impact of the economic downturn on your business, such as cutting spending, renegotiating with suppliers, and strengthening your cash reserves.
• Small businesses can emerge even stronger from a recession.

The National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity that spreads across the economy and lasts for more than a few months. While there are no absolutes when it comes to a recession, rising inflation and contracting US gross domestic product (GDP) over the past two quarters all indicate that a recession is on the horizon.

what happens in a recession

NBER looks at several factors to determine if there is a recession, starting with GDP. But we also look at other indicators to determine if a recession has occurred, such as:

1. income
2. employment
3. industrial production
4. Wholesale/retail sales

During a recession, product sales decline, employers cut labor, manufacturing slows, and spending falls. As a result, the cost of living rises and it can become difficult to find a job. Recessions are common, but especially terrifying for small businesses with limited resources. Fortunately, there are ways to prepare for a recession before it hits your business.

1. Spend less

The time to cut spending is before the recession sets in. Start by tracking your cash flow better. And if you’re not currently tracking cash flow at all, now is the time to start. Also, have a minimum budget that cuts down on extra spending so you know how much you’ll need to spend if sales drop. And if you want to spend more by upgrading your computer, moving to a bigger office, or adding staff, you should probably put those plans on hold.

2. Be more cautious when offering credit terms

In order to remain competitive, most companies believe they need to offer credit terms to their customers. While you may be reluctant to change credit terms for existing customers, it is important to be more selective when offering credit terms to new customers. This may require additional due diligence, but the time spent upfront is more important than time spent collecting delinquent accounts. And if cash flow becomes very tight, a transition to full cash may be necessary, at least temporarily.

3. Get a line of credit

A good way to strengthen your cash reserves is to obtain a line of credit from your bank or credit card company. You don’t have to use it, but just remember that knowing that your emergency cash is readily available can give you some peace of mind. However, like most businesses, banks and financial institutions typically limit the availability of credit lines, so now is the time to apply for them. Before the recession starts. We also advise against over-reliance on credit lines. Banks have been known to reduce or even cancel credit lines during prolonged recessions.

4. Strengthen your cash reserves

If you have cash on hand for your business, now is the time to start pouring additional revenue into it. And if you don’t have cash reserves, it’s a good idea to start saving now. By keeping cash in reserve, small businesses can cover costs if revenues decline. But remember that cash reserves should only be used in emergencies.

5. Re-negotiate with vendors and suppliers

Your vendors and suppliers may be feeling the effects of the economic slowdown just like you. But it’s worth trying to renegotiate. You are unlikely to secure a lower price, but you may be able to get better payment terms or early payment discounts.

6. Manage receivables more proactively

In the past, you may have had some headroom in your credit account for late payments. But with an economic downturn looming, it’s important to know your accounts receivable balance and start the collection process sooner or later. Don’t forget that you may need to change your payment terms (see #2) as your customers are likely starting the same savings as you.

7. Streamlining operations

Streamlining operations is often done as a last resort, but doing so before a recession hits can help preserve staff and maintain current customer numbers. However, if you have a large number of employees, you may need to cut headcount, especially if sales are hit. You may also consider outsourcing specific areas such as HR or payroll rather than looking for full-time help.

Nothing can be done to prevent recession. But successful business owners plan ahead to weather the storm and come out stronger afterward.