How New Businesses Can Weather the Storm of an Economic Downturn
The Covid-19 pandemic gave rise to a surge in Americans starting their own small businesses. Now, two years later, as a possible recession looms amid rising inflation, these business owners are turning their focus to the possibility of a recession. Read on for tips on how new businesses can weather through an economic downturn.
Potential Impact of a Recession
In a recession, consumers cut back on spending, which means demand for goods and services declines, which leads to a decrease in sales for businesses. When there is a steady decline in economic activity and sales, businesses can be forced into the position of needing to lay off employees, or in some cases even shuttering their doors for good.
Additionally, businesses may also face higher costs during a recession as suppliers of raw materials and other goods raise prices in an attempt to counterbalance their own drops in revenue. Higher prices put further financial strain on businesses, leading to more layoffs and closures.
Establish Resilience with Financial Flexibility
If your revenue takes a nosedive, do you have an accessible line of credit or an emergency fund with enough cash on hand to cover your expenses for a period of time? Either of these options will provide your business with some financial flexibility if you experience a temporary decline in sales. Also think about diversifying your sources of revenue. This will lessen your dependence on any one customer or market and help establish more resilience during a recession.
Know Your Risk Factors
Businesses are no strangers to risk factors even in optimal economic times, but during a recession the risks are intensified. You need to be aware of the specific vulnerabilities to your business (i.e., credit risk, supplier risk, operational risk, or financial risk) and establish a suitable plan to address them. This might include diversifying your customer base, suppliers, and range of products; building up your cash reserves; and reinforcing your financial controls.
Evaluate Expenses
As a business owner do you know exactly what you’re spending money on? By doing a self-audit you can identify areas where you can make small but consequential cuts. Pay special attention to things like:
- Subscriptions to apps, periodicals, and software that go unused or don’t bring value to your day-to-day operations
- Recurring expenses such as phone services, utilities, and bank account fees
- Operation costs and advertising
You might consider shopping around to find vendors who can give you the best deal. Remember that small businesses have more negotiating power in a turbulent economy.
Find New Ways to Drive Sales
When you begin to notice a downward trend in revenue, it’s time to look into new ways to drive sales. This could include modifying your marketing efforts, providing discounts, issuing new products or services, adjusting prices, and cross-selling to customers.
Invest for Future Revenue
Even during an economic downturn, small business owners are wise to spend some money upfront to gain longer-term cost savings. It’s especially important to consider if cash you’re currently spending in other areas of your business could be redeployed for the purpose of investing in future business and revenue. For instance, are there portions of your business that could be automized or digitized? Can you switch to an online training course rather than onsite? What about your marketing approach? You’ll need to strategize this one, but communication with customers is key to keeping steady sales. After all, the future of your business relies on maintaining and growing your customer base—in good and bad economic times.