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Updated: July 14th, 2020
Business closures and stay-at-home orders from the last few months have left many businesses struggling financially. 85% of small business owners in the U.S. said they were negatively affected by COVID-19 restrictions, according to a May 2020 report from Alignable.
As economic experts discuss a potential economic collapse, it’s important to begin adopting strategies for managing a business during a recession. Doing so can help you stay afloat — and even thrive — during tough economic times.
“When you start hearing or reading the news out there about a recession, be proactive and don’t wait until the storm arrives,” said Christina Sjahli, a CPA and the owner of Christina Sjahli Consulting, an on-demand CFO service for women entrepreneurs. It’s critical to start planning for potential hurdles, she said.
Keep reading for eight actionable ways to manage your business during a recession.
Many business owners stretch themselves thin, trying to do everything, rather than focusing on what they’re best at. If you offer multiple products or services, it may be time to reevaluate what works and what doesn’t.
If you sell goods, “identify your top five products based on profitability and customer interest,” Sjahli said, “and consider eliminating the other products to save on production costs.” For a service-based business, she said, try shifting your energy to your most profitable offering or the customer demographic generating the most revenue.
A recession plan that includes narrowing your focus allows you to continue serving customers and clients without maxing out your budget or wasting resources.
One of the best ways to protect your business against financial downfall is to maintain a healthy cash flow. You can improve your cash flow in two ways: by increasing your profits or being mindful of your spending and saving.
If your business is still playing catch-up in revenue and sales, you may need to rely on strategy to increase your cash flow steadily. Here are four tactics to try while managing a business during a recession:
It’s a good idea to keep at least two months’ worth of business expenses in cash at any given time, said Carter Cofield, a CPA and the owner and lead advisor of Cofield Advisors.
“If monthly expenses to operate your business equal up to $10,000, you should keep a minimum of $20,000 in your bank account at all times,” he said. “This gives you a 60-day operating cushion to make vital decisions if a recession hits your industry.”
Another option for a recession plan is to allocate a certain percentage of your business’s revenue each month to a designated savings account. “Fifteen percent of each dollar in my business goes to a profit account to help me build cash reserves,” Cofield said.
Managing a business during a recession while maintaining cash flow requires balancing accounts payable and receivable. If you have to wait 30 or more days for client payments, you may want to negotiate different terms, Sjahli said. “Maybe you offer a discount if they pay you in 15 days to 30 days, or start charging interest for anything over 30 days.”
On the other hand, if your payables’ timeline is too short, you might want to ask your suppliers for a longer payment term or a discount if you pay before 30 days, Sjahli said.
Improving inventory management can help you save money while maximizing sales. If your orders are too large, you may end up with dead stock every month. Or you might find that some products simply don’t sell as quickly as others.
Whatever the situation, buying and storing products you can’t sell promptly ties up cash flow. One option while recession planning to free up cash is to “start reviewing your slow-moving inventories and sell them at a bargain,” Sjahli said. However, it’s also crucial to review your sales and forecasts to make sure you’re ordering the correct amount of inventory.
If you’ve invested a good chunk of your business’s cash into your assets, make sure they’re working. “If you have extra space in your warehouse or office,” Sjahli said, “consider renting it out.” You could also sell or rent unused equipment, whether it’s a forklift from your warehouse or a used copier.
You may be tempted to cut your marketing budget to save money, But, promoting your business is critical to recession planning for overcoming difficult times. “Never stop marketing,” Sjahli said. Strategic promotion can help you retain current customers and secure new ones.
“What you need to do during tough economic times is to reimagine your marketing process,” Sjahli said. Reevaluating your marketing strategy’s effectiveness starts with reviewing the ROI for each of your distribution channels.
Rather than investing in multiple marketing methods, said Sjahli, try putting your resources into the strategies with strong records of success. Depending on your business, that might be social media ads, email campaigns, or videos.
Once you determine which areas to invest in, examine your messaging to make sure you’re appealing to your target demographic. You may need to refine your brand voice, change your tone, or create a better value proposition to establish a rapport with potential customers and foster trust.
Another way to control your finances while managing a business during a recession is to cut costs. To prioritize your expenses, try doing an expense audit. “An expense audit is when you go through all recurring business expenses and ask two vital questions: 1) Do I need this expense? 2) Can I get this service or product at a cheaper cost?” Cofield said.
The key is to reduce or eliminate costs that have little to no negative effect on your business operations. You may temporarily scrap the office lunch budget, for example, or switch to a more affordable payroll provider.
It’s also a good idea to look for money leaks, areas that drain your business’s cash. Money leaks can be straightforward, like a virtual storage subscription you never use, or more systemic, like high job turnover resulting from inadequate training.
In any case, eliminating unnecessary costs and fixing internal money leaks can free up cash for operating expenses and marketing efforts.
Overcoming tough times requires a well-thought-out recession plan and adaptability. “Focusing on survival only doesn’t mean you will have a business after the recession. But focusing on growth and innovation alone doesn’t mean you will survive during the recession,” said Sjahli.
It’s essential to balance your immediate financial needs with your goals — and diversifying your revenue can help. There are plenty of ways to do it. “For example, if you have a brick and mortar store, tap into e-commerce,” Sjahli said. “If you are only selling in one country, think about expanding to another country.” Creating a membership product is another good way to bring consistent revenue to your business, she added.
If you’re not sure where to start, try reimagining your current offerings or brainstorming ways to repurpose your work. For example, if you run a restaurant, you could sell an ebook sharing your customers’ favorite recipes and the stories behind them. If you own a tutoring center, consider turning a few of your lessons into online courses.
A recession plan that includes diversifying your revenue can help you get more business in the short-term and grow your customer base in the long-term.
Financing can give you the cash flow flexibility you need to survive a recession. Before you look into your options, though, review your business’s financials and make a cash flow projection for the next 12 months and beyond, Sjahli said.
Next, take time to clarify what you need and how you’ll use the funds to grow your business during the recession. “This is especially important if you are taking a long-term debt where the loan repayment depends on your business growth,” said Sjahli.
Having a good understanding of your business’s financial health and goals is key to determining which type of financing is best. Depending on your situation, you may want to consider one of the following loans:
A line of credit can help with temporary gaps in cash flow or ongoing operating needs, like rent or utility bills.
A term loan is a good option if you need money for a more significant purchase or capital-intensive growth project.
Equipment financing can be helpful if you need to replace or upgrade your business’s technology or machinery.
Invoice factoring may be a good solution if most of your cash flow is tied up in accounts receivable.
Customers are your business’s lifeline. Without customer loyalty, your business won’t last during good times, let alone during an economic downturn or recession.
Fortunately, “times of massive uncertainty like recessions give you an amazing opportunity to build ‘sticky clients,’” Cofield said. “Recessions cause fear in everyone,” he explained, but “if you can stay alongside your clients during these tough times and add value when they are fearful, they will never forget you and most likely never leave you.”
When managing a business during a recession, it’s crucial to consider how you can better address your customers’ needs. Gather intel by reading your business’s online reviews or sending email surveys asking for feedback. Depending on what your customers say, you may need to offer more product options, shorten your delivery window, or improve customer service.
Taking better care of your customers isn’t just a useful goal — it’s an investment in your business’s success and longevity. Not only will you secure repeat customers by prioritizing service, but you’ll also benefit from referrals.
It’s tempting to make decisions based solely on your business’s immediate needs. But, taking a long-term view while managing a business during a recession can get you much farther. “You must think about how you want your business to look after the recession,” Sjahli said.
Take the time to write down your short-term goals and long-term visions for your company. You may want to break even on your spending or increase profits by 10% over the next quarter in the short-term. Long-term, however, you may want to franchise your business or buy a second company.
Viewing your business with long-term growth in mind can help you make smart choices and create a better recession plan right now. “Your business decisions during the recession must align with your why, your core values, and the culture you want to build,” Sjahli said.
Whether you’re recovering from the effects of COVID-19 or running a business, as usual, it’s essential to take steps to recession-proof your business. Strengthening customer connections, diversifying your revenue, and improving cash flow can help you manage a business during a recession. In the meantime, if you need financing or resources, we’re here to help. Check out our comprehensive COVID-19 business guide.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.