How to Prepare Your Small Business for a Recession

20 Dec 2022

Written by: Holly Woodward

It’s hard to make it through a news cycle these days without being hit by an onslaught of downbeat economic news. Inflation. Interest rates. Consumer sentiment. GDP. It’s tough to find any experts putting a positive spin on it.

So as a small business owner, what does it mean for you? Will you feel the pinch, and if so, how bad will it be? While every industry and business face different dynamics, there are a handful of principles that can help all small businesses prepare for a recession.

1. Cash is king

When small businesses fail, the culprit is often a zero cash balance. So how do you avoid that? With some operating history under your belt, you should have a good idea what your cash burn looks like. In other words, how much cash are you spending each month?

Then consider your revenue. What are the chances it drops by 10%? 25%? 50%? Some simple maths will give you a sense of how long of a runway you have before you run out of cash. If you don’t feel like you have enough runway to weather a recession, look for short-term ways to reduce spending.

2. Focus on your profitable core

Steven Covey, the author of The 7 Habits of Highly Effective People, among other great business books, is often credited with the mantra, “The main thing is to keep the main thing the main thing.” We are more fragmented than ever, but as a small business owner, it’s up to you to decide where to focus your resources. What is your core product or service? Is that where the bulk of your profit comes from? If so, a recession may not be a great time to take your eye off that in favour of shiny distractions.

Remember that revenue is often a vanity number - while it’s nice to say you run a $5M business if you only keep $50K of that, your runway we talked about earlier will be extremly short. Instead, I’ll bet on the $1M business that generates $200K in profit to make it to the other side of a recession.

3. Remain calm

It’s easy to get swept up in the feeling that the world is crumbling around us, but there are two key things to keep in mind. First, we’ve been through rough spots before. The Global Financial Crisis. The Dot-Com Bubble. Many, many, many recessions before. It’s called an economic cycle because things go up, then they come down, and then they go up again. Take a breath and know that this will pass.

Second, the timing and severity of the next recession is out of your control. By staying calm and focusing on the things you can control, you’ll be a more grounded, logical small business owner who stands a greater chance of success.

While no one is excited by the prospect of a recession, small businesses are the backbone of the economy and have weathered storms like this before. By conserving cash, focusing on your core, and staying calm, you’ll set yourself up to thrive in the future.

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