In our previous article, we reviewed if a recession is on the horizon for small business owners. In this article, we take a look at what small business owners can begin doing now to prepare for a recession.
Start With Planning and Budgeting
One way to ease uncertainty and plan for a recession is to determine how a recession will impact business operations. Do this by:
- Creating a budget now for the year ahead.
- Reviewing and planning for the next year or two.
- Running forecasts and different (best case, worst case, and most likely) what-if scenarios.
By running these exercises, small businesses can project what will likely happen if sales drop 10%, 20%, or even more. Forecasting can also show positive results if a recession is shorter, softer, or even somehow avoided.
With a full review of plans and budgets, small businesses can begin taking preventive measures to reduce expenses and set a plan to take further action as events warrant.
Create a Cash Reserve
One way to withstand a recession is to have a cash reserve. Now is a good time to:
- Improve cash inflows
- Reduce cash outflows
- Build up cash reserves, including an emergency fund
Cash reserves can help every business better overcome the ups and downs. If even additional cash reserves are needed, consider possible avenues for capital infusions and/or obtaining debt (see below).
Review and Manage Expenses
When it comes to expenses, it’s time to think critically about the business. What was once necessary may no longer be needed. Review expenses with a fine-tooth comb.
- Where is money being spent that’s not adding to the bottom line?
- Does it also make sense to delay or forgo upcoming expenses?
- Is it possible to negotiate or renegotiate contracts? When possible, suppliers and vendors should be negotiated with to try and lower those costs.
Review Staffing, Employment, and Compensation
It’s never easy nor enjoyable, but if it is ever necessary, now is the time to review teams and determine which employees should stay and which can go.
- List employees in order of who would be cut first to last.
- Write why certain employees are invaluable and hard to replace.
- Document which employees can be let go with minimal impact.
- Identify roles and even teams that can be outsourced at a potential savings.
- Set expectations that bonuses and profit sharing are most likely not going to be feasible.
- Potentially even ask senior management to take small pay decreases to shoulder through an 8-12 month period.
Invest in Technology to Streamline Operations
Though it may appear counterintuitive to incur unplanned expenses at this point, now may be the best time to invest in technology that promotes employee production and enables greater operating efficiencies. Consult an accountant, but technology expenses usually can be depreciated, thus further reducing tax liabilities and improving cashflows.
Will A Downturn Last A Long Time?
Usually not. Modern recessions (post World War II) typically last between 6 – 12 months, and the period that follows is usually a time of rapid growth and expansion, especially for businesses that are still in stable or strong financial positions.
There definitely appear to be economic storm clouds on the horizon, and ignoring the current signals of a recession will not make this threat go away. If businesses prepare and plan now, they’ll have an easier time dealing with times of uncertainty, and on the backside, may even come out ahead during an eventual recovery.
“Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America,” Warren Buffett said in his annual 2021 letter to Berkshire Hathaway shareholders.
Begin Planning Now
If you want to start planning now, and we think you should, please reach out to us here at Ten Key. As your bookkeeper, we have a close eye on your expenses and can help you navigate any changes or adjustments that need to be made to your business.