Despite their nationwide collective power, small businesses can be extremely vulnerable – particularly during an economic disaster. This was something that many small businesses faced during the COVID-19 pandemic, when businesses in virtually every industry were forced to shut their doors with no clear timeline of when they would be able to reopen.
Now, many experts predict that a recession may be on the horizon. While it is still just that – a prediction – it’s smart to take steps to prepare your small business in case a recession does become reality. Even if the predictions are incorrect, there is no harm in being proactive about protecting the business that you’ve worked so hard to build.
Preparing for a Possible Recession: Breaking Things Down
It’s important to acknowledge that while a recession may or may not actually arrive, you should be aware that it could cause major issues for your business. A recession can bring about uncertainty – something we’re all a bit familiar with due to COVID-19. Few could have predicted the impact that COVID-19 would have on our economy and day-to-day business operations. It’s also important to keep in mind that every recession won’t be the same. Although the “Great Recession” of 2007 to 2009 saw inflation, it wasn’t until February of this year that inflation rates hit a four-decade high. Because every recession and economic disruption is different, you don’t want to assume that the same practices that got you through the last one will work equally well in the future. With that said, doing your best to prepare today, will help to ensure you’re on stronger footing tomorrow.
Here are some things you can focus on to help prepare your business for a recession:
Supply Chain Disruption
One of the most important steps that you can take to help prepare for a potential recession involves tackling a lot of the issues that you’re probably facing right now. First is the supply chain disruption that is impacting virtually every business.
Over the last several years, supply chains have grown increasingly complex. There are a lot of moving parts and a lot of various vendors that play pivotal roles in getting goods, parts, and other items from point A to point B. A disruption at any link in the chain has the potential to impact everyone else involved, as we’ve already seen up close and personal this year.
To combat these challenges, it’s imperative to take stock of your own supply chain complexities and identify where your biggest vulnerabilities rest. If you work with six other vendors to source your products, consider what you would do if one, or more than one, of them experience disruption in the future. Do you know of any alternative sources you could turn to, to help minimize the risk to your own business? Getting ahead of questions like this before conditions suddenly change is imperative.
Managing Cash Flow
Another major issue small businesses face (and one that could make or break your business during a recession) is cash flow. Cash flow is about more than just understanding the amount of money coming into and going out of your business. It’s also about where that money is going and what it is being used for. It’s about understanding what value your expenses are generating and which budget items can be quickly trimmed in the event you need to do so.
However, it can be difficult to make those decisions without a thorough understanding of your existing cash flow. Sitting down with an accountant or financial advisor to review your finances and financial statements can be beneficial to help you get a clear picture of your business’s financial situation. Look at outstanding client invoices and see which ones are known for paying on time, and which ones are prone to needing a bit of additional prodding. See if there is anywhere you can save money through your ordering practices. Even if a recession never comes, it will still help you avoid potential problems in the future if money becomes tight.
Be Aware of Financing Options
Exploring potential financing options before you need them is another great way to make sure that you’re prepared if a recession does come to fruition. In a time of panic, knowing your options can help ease the stress. For example, what if your customers and vendors were to suddenly stop paying their invoices? What would you do to make up the difference until things stabilized?
A wide range of loan options are out there, including business lines of credit and small business loans, as well as options backed by the Small Business Administration. A business credit card is something else to consider for multiple expenses as well as invoice financing if it is needed. Analyze what your needs might be and what you could qualify for. It could also be helpful to have a conversation with your bank to see what they recommend and if there is any paperwork you can fill out ahead of time, such as a pre-approval, so you’re prepared if and when you do need quick financing.
If any impending recession should be caused by a major disaster, as was true with the COVID-19 pandemic, you could also look into disaster relief options that may become available. SBA Disaster Relief Loans are a low interest option. A number of grants may also become available depending on the situation, as well as local resources to help protect area businesses.
If your business model and your products or services allow for it, it can also be worthwhile to consider a lower-price point option to offer during tough financial times. If a recession does come, it will not only make an impact on businesses, but households as well. Look at things from outside of your business role and consider what might be changed on the consumer side that could save you both money.
At BankFive we believe our local business customers are the lifeblood of our communities. If you are a small business owner in MA or RI and would like to learn more about how our products and services can help you navigate today’s rocky economy, schedule a free consultation with a member of our Business Banking Team today.