Life hasn’t been easy for small business owners over the past few years. The pandemic was an extreme global health risk, and put a stranglehold over global markets and business.
Now, as the US (and world at large) attempts to turn the corner from the pandemic, chatter over the dreaded r-word–recession– is plastered across all news outlets.
It seems like small business owners can’t catch a break—and need to brace for another crisis.
Fortunately, there’s a silver lining to bad economic news.
Not only are recessions somewhat normal to our economy, and there are steps you can take to reduce the potential damage a recession can deal to your business, enabling you and your company to emerge even stronger from it. ExitBig will show you how.
What is a Recession?
Recessions are major declines in economic activity, seen across the economy in consumer income, employment, industrial production, and GDP.
The old definition–negative economic growth for more than two consecutive quarters–is no longer used.
Is the U.S. Currently in a Recession?
As of the time of this writing, we are not. Unfortunately, it’s still too early to say. Unemployment and many other economic factors are lagging indicators, meaning that they’re only known after they occur.
But here’s what we do know about the current economy.
Employment is Still Healthy
The unemployment rate in May was 3.6%, which is quite low—a very positive sign. Interestingly, there is actually a labor shortage (as you might be experiencing), and there are currently two open positions for every available worker. The current U.S. employment situation is good news for the economy.
Inflation is Public Enemy #1
On the other hand, due to supply chain disruptions and other global events, average prices have risen between 7% and 8.5%. In fact, May’s 8.6% inflation is the highest inflation level the country has seen since 1981.
If inflation rates remain too high for too long, it will destabilize the economy, distort spending, and make a forward-looking approach to your business nearly impossible.
Interest Rates are Rising Rapidly
One of the Federal Reserve’s two major mandates is to keep inflation stable. And, one of its major tools to manage inflation is setting the interest rates that trickle down and influence the demand for home loans, car loans, and other types of consumer debt.
To this end, three interest rate increases have already taken place in 2022. The most recent .75% rate increase was the biggest hike in 28 years.
This will increase the costs of borrowing for individuals and businesses in the near future. Nevertheless, these new interest rate increases are still relatively low when compared to the years before the Great Recession.
Next Steps for Small Business Owners
With these major factors in mind, here’s what you can do to prepare for a recession and lighten the blow, if one takes place.
Solid business practices help in any economy, especially a recession
It’s always important to run your business well. While you can get away with cutting corners or not crossing your Ts and dotting your I’s when the economy is flourishing, a rocky economy makes poor business management glaringly obvious.
The good news is all the items are well within your control. With inflation as one of the biggest threats to your business now, start by taking a second look at your inventory.
Manage Your Inventory Effectively
As you know, your inventory cycle is fully dependent on your sales cycle. When looking at your business, what serves you best? Is it better to order more inventory ahead of potential shortages or higher supplier prices in the future? It may be best to get ahead, if you can afford it.
Increase Prices with Caution
Your product or service is also important here, too. If you were to increase or decrease your prices slightly, how will your customers respond? If your customers can tolerate a price increase, then it may be a good idea to raise your prices, especially if your suppliers are doing the same.
Look closely at your products, competitors and suppliers, and make sure that you aren’t caught on the wrong side of supply shortages (where possible) or forced to surprise your customers with a late price hike.
Supplier Relationships
Your suppliers have a business to run, too. Having a solid relationship with your suppliers can go a long way. Can you renegotiate your current contract? Or are there alternative methods of financing that can benefit you?
Explore your options with your suppliers, it may serve you very well in the long run.
Don’t Dawdle on Debt Management
Debt isn’t your enemy. But using a disciplined approach to your business’ debt is a huge win for your business. Rising interest rates will naturally make your regular payments more expensive. Worse, higher debt service coupled with inflation will choke your cash flow even further.
Important Questions to Ask, and Steps to Take on Your Debt
Look at your outstanding payables, is your debt service sustainable with your current cash, amid this year’s inflation? It might not be the best strategy to assume your business can absorb higher debt service in the future.
What steps can you take to improve your small business’ debt situation? Look at your debt portfolio and consider focusing on paying down high-interest rates. This will take the pressure off your cash flow a bit.
Chat with your bankers. Your bankers want you to be successful and are willing to work with you and find creative financing solutions.
Watch Your Competitors Closely
Even during a recession, keep in mind that you’re still competing with other small businesses in your industry. Watching them closely can help you plan your next move.
How are they handling their business when the economy experiences disruptions? Are they going through layoffs, are they raising their prices? Use this intel to your advantage, so you can avoid the pitfalls they’ve fallen into, or use their missteps as your gain.
Are any Competitors Worth Acquiring?
It may also be a good idea to consider making a strategic acquisition of a key competitor, or a key line of business. Not only will this eliminate direct competition, but it may also be cheaper or easier to add a new service line, acquire new staff, or leverage new technology or processes that can boost your business. Once you have an idea of how much your business is worth, you can take action and begin seeking buyers, or make a plan to spruce up your books.
Make Sure Your Marketing is Effective
Marketing is always one of the first few items that small business owners cut when expecting an economic slowdown. But, doing so may rob you of an important leg up on your competitors. Resist the urge to cut your marketing too soon.
Not only should you hold off on your marketing budget, but you should actually take a second look at your marketing budget, and ensure that it’s truly working for you.
Is your Small Business Marketing Strategy Working?
The dollars you spend on digital and local advertising, your website and more, must translate back to either awareness of your company with the right audience, generate website traffic, or act as a reasonably clear driver of sales.
If you work with a marketing agency, you're well within your rights to request a marketing results report, or have a discussion on the effectiveness of your marketing strategy.
Consult with an Expert (and Advocate)
Running a business isn’t easy. But having a good team around you gives you a great chance of success. Instead of going it alone, talk to ExitBig about preparing your small business for a potential recession, acquiring a competitor, selling your business, and more.
Our team has deep experience in entrepreneurship, leadership, finance, banking, and business acquisitions, and provides unrivaled service and expertise to small business owners.
Are you ready to maximize your business?
