We’ve got an overheated economy and a bear market. IF we reach a recession this year, is your business ready?
No one wants a recession, especially small business owners. Why? Because disproportionately, recessions hit small businesses harder than anyone else. Not only are they hit with less revenue, but often their lenders tighten up as well. After the 2008 financial crisis, we saw a pretty substantial contraction in debt — mostly caused by lenders tightening loan standards and interest rates. This absolutely could have resulted from a decline in credit supply to small businesses.
So what can you do today to make sure you’re ready tomorrow? Here’s how to recession-proof your business:
Two keys: Financial planning and business operations
Today we’re going to focus more on financial planning, but why are both of these ideas so important? Because they’re going to give you the blueprint to talk about the action steps you’ll need to take on the operations side. Good financial planning gives you the ability to take action while understanding the context of what’s going on with your business. If you don’t have that, you’ll really just sort of be guessing at what might work – and realizing what doesn’t – too late.
Get good data: P&L, customer history, etc
Sure, things are great now. That’s awesome! But you don’t want to wait to make sure that you have good clean data (that includes a clean P & L). You’re also going to want a good customer history. That’s an evaluation of how your clients are allocated throughout your business. Is your revenue from just a few clients? Are you well-diversified? Less diversified isn’t necessarily a bad thing, but it might mean a big hit if one or two of those clients contract their services because of a recession.
This is the information-gathering stage. Basically, you want to get an idea of what your risk factor is during a recession. This also means looking internally. Look at how long it takes to pay your bills and how long it takes for your clients to pay you. How long does it take to cycle your inventory?
Also: It can be hard to do, but you’re going to have to understand the pecking order of your team, how much revenue it takes to maintain everyone on payroll, and if you need to adjust your staffing. This doesn’t have to be a closed-doors situation. You’ll want to make sure your team is on the same page, so that they can also be confident in your recession plan.
Action item: Improving your cash flow
Now that you understand your business blueprint, you have some options about what you can do to improve your cash flow. You can adjust terms, offer additional incentives to pay faster, and even try to re-diversify your customer base. You can also slow down payments to your vendors in some situations, which might mean negotiating longer payment terms. It also might mean changing vendors for items that can be replaced.
Loan modification can also be an option in some circumstances. If your debt service is higher than you think your cash flow would be while impacted by a recession, you can go to the bank and communicate that to them. In some cases they may refinance your note into a more affordable payment, extend the loan, or even do a five year ARM.
Action item: Create a business line of credit
If you don’t have a business line of credit, get one now. There is a small fee that you’ll incur every year – but the worst time to get a loan is when you need it. Then, the lenders will be totally dictating the most favorable terms for themselves. Put yourself in their position. It wouldn’t be a good idea to loan money to an already failing business. But a business that’s just thinking about all possible outcomes? That’s a smart bet on someone who has their contingencies mapped out.
Action item: Plan for what you need
If you’re fearful of economic conditions, we recommend that you have three to six months of cash reserves. You want enough to cover your expenses for that length of time. To do that, you might want to create a money market account with that money in it, so it can earn interest instead of just being static money. While it might feel funny to not be immediately investing right back into your business with that money, you need to have that safety net.
Action item: Meet with a financial professional
Look, we get it. It’s not always fun or easy to think about these things. The good news? There are great folks who think about it every day for their clients. If you have a financial professional in your life that you trust, we recommend exploring some of those options with them. They may have different ideas, or they may be the same, but at least you’ll know that you’ve explored every option available to you.
After all, this is your business. You built it. You need to give it every chance to succeed, no matter what’s happening in the rest of the economy.