Business planning for a recession is just as important as planning for growth – with the right preparation, you can minimize the negative impacts should a downturn occur and you may even find opportunities to grow. Although the U.S. economy isn’t currently in a recession, since they’re a regular part of economic cycles, it’s always a great idea to be prepared.
Is a recession on the horizon?
Historically, there are several signs or circumstances that when taken together have been “red flags” of a recession on the horizon.
When demand for goods and services is greater than the supply, this leads to rising prices, known as inflation. When inflation rises above the Federal Reserve’s annual target of about 2-3%, they try to lower the amount of cash that’s floating around in the U.S. economy.
One way they do this is by making it more expensive to borrow money by raising benchmark interest rates. These are the rates that banks and other lenders use to set their interest rates for mortgages, auto loans, and other loans.
When it costs more to buy goods and services as well as to borrow money, demand tends to slow down. This can help in lowering inflation and act as an overall reset of the economy. However, when that slowdown results in two consecutive quarters of gross domestic product or GDP contractions, that’s considered a recession. For the most part, recessions are mild, but in some cases, they can be severe and longer-lasting, especially if unemployment rises along with a recession.
Some of these “red flags” are present now, which has some economists pointing to the potential for a recession in our future. But remember: Recessions aren’t anomalies, although they can be painful if you’re not prepared, they’re also a regular and important part of a healthy economy.
Business planning for a recession: Simple steps to take now
The best way to prepare your business for a recession is to have sound financial management practices in place, as well as enough working capital available to weather any setbacks. Here are some additional steps you can take to make sure your business is ready:
Watch for subtle shifts in customer confidence
Even before a recession is “officially” declared, you may notice some changes in your customers’ buying habits. Look for things like slower retail sales or a reduction in the size or quantity of the orders you receive. Whatever business you’re in, it pays to stay on top of subtle shifts that can be indicators of reduced customer confidence and adjust your marketing and sales strategies accordingly.
Manage your borrowing costs by consolidating or eliminating high-cost debt
Refinancing your high-cost debt into a loan with a lower interest rate can help free up cash that can be used elsewhere for your business. Additionally, depending on your needs, you can consider flexible funding like a line of credit, which gives you access to capital and requires payment of interest only if the line is used.
Create a plan to reduce operational expenses, if needed
In the event of a longer or particularly severe recession, you may need to reduce some business expenses. Creating a plan now can help you approach recession-based challenges with confidence and control.
Trim the expenses that are easy to release and recapture, rather than expenses that are more difficult to acquire and retain. For example, layoffs may not be the first cut, because it’s often costly and time-consuming to hire and retain employees. You can also look for ways to consolidate operations to reduce some expenses. Such as if you’re using different insurance companies for vehicles, property, liability, etc., make some calls to see if you can get better rates by bringing all your needs to one agency.
Here are some additional options:
- Stress-test your cash flow projections. Create likely, potential, and worst-case scenarios in which you reduce your revenue by 10%, 25%, and even 50% while maintaining your expenses. This helps you understand how an economic slowdown would impact your profitability and the impact on your cash reserves. As you’re reviewing your financials, you may also find areas where you can try to pivot your business. This strategy helped many business owners discover new revenue lines during the pandemic and it can be helpful any time a financial setback happens.
- Use this time to strengthen your relationships with suppliers, distributors, and customers. You may need to help each other, and improving those relationships can become an important competitive advantage.
Business planning for a recession can also mean preparing for growth
Although it may seem contradictory, a recession can be a great time for your business to grow if you’re properly prepared.
The hard fact is that many businesses aren’t prepared for setbacks. Be sure that you have ample cash on hand for slowdowns – it will enable you to make sound, proactive decisions. You may also find that competitors are ready to sell or otherwise combine forces and you could come through a recession better positioned than ever.