The “R” word is being tossed around a lot, and a survey from Q2 2022 found that 81% of small business owners expect a recession this year. High inflation and rising interest rates are two reasons to prepare for a recession.
Fortunately, the average recession dating back to WWII lasts around 11.1 months.
Of course, no one knows for sure what a potential recession will hold in 2022/2023, and instead of dealing with a potential storm as it comes, you can take steps to prepare for a recession today.
6 Tips to Prepare for a Recession as an SMB Owner
1. Tighten Up Your Cash Flow
Cash is going to be a major issue if sales slow. You’ll find many ways to tighten up your cash flow to ensure that your business has the funds to stay in operation. A few of the ways that you may want to begin tightening up cash flow is through:
- Customer insights, so that you can see which customers are paying on time and which are not
- Renegotiating terms with suppliers to allow you more time to pay invoices
- Creating automated systems for invoicing and reminders to encourage rapid payment
- Adding in late payment terms to an invoice
- Encouraging faster payments with a small discount if the invoice is paid in net15
When you encourage faster payments and can defer some of your expenses even for a few days, it can make a major difference in the financial health of your company.
2. Consider Tax Planning
Are you leveraging tax planning to your advantage? If not, now is the time to sit down with a tax planner and see if there are ways that you can keep more money in your business. An excellent example of this is if you’ve recently purchased equipment.
You might be able to take an immediate deduction for the equipment this year, helping you save substantially on taxes.
The planner may also find ways to:
- Leverage tax credits
- Restructure to save money
- Accelerate or defer income
- Etc.
Lowering your tax burden will keep more cash in your business. If a recession does hit, the cash will provide a substantial cushion that may mean the difference between staying in operation or shutting down.
3. Review Your Operating Costs
Operating costs go hand in hand with cash flow, but they should always be reviewed and tweaked whenever possible. For example, you may find that you can reduce costs through:
- Retraining employees to improve efficiency
- Incorporating new technology to streamline operations
- Improving workflow
You may be able to negotiate with vendors to lower costs or may even want to find other ways to reduce operating costs. Unfortunately, many companies are laying employees off in anticipation of a recession, and this may be something that you need to discuss with HR.
Additionally, you’ll want to review all of your expenses to find areas where you can begin saving money, such as:
- Paying for SaaS solutions that aren’t in use
- Software licensing that may be lowered to other tiers
- Etc.
Operating costs must be considered for all businesses. You’ll even want to determine the profit margins of the items you sell and eliminate any that have profit margins that are too low to be sustainable. Reducing inventory for non-profitable or non-selling items will keep more money in your business.
4. Work on Securing Potential Financing
Taking on debt unnecessarily is never advised in business, but you should prepare for the worst now while interest rates are at their current rate by securing financing. You’ll want to consider two types of financing:
- Line of credit
- Credit cards
A line of credit is one of the best forms of credit you can have because you can use and then repay the account multiple times. If you need cash to pay for inventory or for payroll, already having financing options in place will help your business survive.
Ideally, you’ll leverage any business relationships that you already have in place for financing.
For example, whoever you have a business checking account with already has a wealth of data about your finances. If the bank already sees that you have strong revenue, they’ll be more willing to extend a line of credit to you.
Even if you never use the financing you receive, you will have peace of mind that it’s available if you do need it in the future.
5. Meet With an Accountant
Meeting with an accountant is one of the best decisions that you can make during times of uncertainty. Your accountant can help ensure that you’re not sabotaging your accounting or spending money that you don’t have.
An accountant can help you:
- Plan for best and worst-case scenarios
- Budget for the coming months
- Run sales forecasts
- Etc.
Your accountant can help you prepare for a recession in ways that you likely overlook. Additionally, the right professional will overlook many of the steps taken previously in this article to ensure you’re safeguarding your business to the best of your ability.
6. Build Up a Cash Reserve
How much cash does your business have? If you don’t have any cash reserves, you’re putting your business at unnecessary risk. Cash reserves will help you withstand a recession by ensuring you have funds to pay your debts.
However, if a recession does happen within the next quarter or two, you won’t have much time to build up your cash reserve.
You should:
- Start adding money into a cash reserve
- Add any savings that you have from previous points to the reserve
- Try to save 30+ days of expenses
Cash is always advantageous for a business to hold, so even if a recession doesn’t hit, the cash you keep in reserve will allow you to take advantage of business opportunities in the future.
Most businesses cannot survive 45 days without bringing any money in. Building up your cash reserve will stretch this figure out drastically.
If you begin planning for the worst today, you’ll position your business to withstand a potential recession. In the worst-case scenario, all of your business’s planning will strengthen your company financially and make it easier to withstand sales fluctuations.
To learn more about how we can help you prepare for a recession, click here to schedule a consultation.
