How to prepare your business for a possible recession

By Barry Moltz
SMB Insights | Originally published Oct 14, 2022

While recessions typically come around every 10 years or so, it can still be hard for small business owners to be fully prepared. I have been through many recessions, and I am still surprised when the economy stops growing!

In the early 1990’s recession, I had just been fired from my job and decided to start my own business. Then, when the dot-com bubble burst in 2001, I was fortunate to have already sold my company and started to invest in startups as an angel. During the Great Recession of 2008, some of my customers prospered enough that it had a blunted effect on me. And most recently, in the COVID recession, I turned from in-person speaking events to focusing on mergers and acquisitions of small businesses.

By strict definition, we are now in a recession: two consecutive quarters of negative GDP growth. But not everything in the current economy is following this definition; unemployment is still low, and the U.S. is adding jobs when in a recession these trends typically go the other way.

Whether we’re entering a recession or not, this is what you can do to prepare and make your small business healthier for whatever the future holds:

• Track and preserve your cash
• What directly affects your cash flow
• Manage profitability
• Lower fixed costs
• Keep employees variable and available
• Pay less rent
• Lower employee turnover
• Diversify your revenue streams and customer base
• Decide what to quit

Track and preserve your cash

In a recession, revenue and payments from customers tend to shrink or slow down. Depending on the services or products you offer, your small business sales will likely go down. The customers you do have may take longer to pay their invoices, as they likely have less cash flow to pay their bills on time.

For your small business, cash is the gas that makes your business engine run. Without cash, your business stalls and can’t grow or even pay its financial commitments on time. In other words, cash isn’t just king; it’s every other winning card in the deck! On the other hand, if you have enough cash in a recession, you can make investments that are typically less expensive due to lower demand.

In this economic climate, the essential financial report to understand is your cash flow statement. Most basic accounting software packages offer a standard cash flow report, but few small business owners are trained on how to read it, so it isn’t reviewed as often as it should be (at least on a monthly basis).

In financial terms, cash flow is defined as cash receipts minus cash payments received over a given period (usually a month). It’s the movement of money in and out of your business. The major formula for cash flow combines your monthly accrual profit, the change in accounts payable, the change in accounts receivable and the change in inventory. Other things like borrowing money or paying down long-term loans can also affect cash flow. The higher your monthly cash flow number, the healthier your company is — and the better it can withstand any downturn in a recession…[MORE]

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To read the entire article by Barry Moltz at the SMB Insights website , visit: How to prepare your business for a possible recession