Are we in a recession, which is defined as a significant decline in economic activity or two consecutive quarters of GDP contraction (something we’ve already had)? Some experts nonetheless argue that we’re not there yet, but is a recession on the horizon? We know from past experience that the experts don’t know any more than we do. Recall the dire predictions of a recession at the end of 2018 that drove the stock market down in December 2018. And it turned out that 2019 was a boom year. Nonetheless, it’s a smart business strategy to follow the proverb to prepare for the worst and hope for the best.
Ways to prepare your business for recession
1. Rein in spending
It’s always wise to keep spending in check; the better you do this, the greater your bottom line. However, with a recession, you may have less revenue to pay for things you committed to. Look at your subscriptions, car leases, rent, etc. and see where changes should be made, if you can.
Going forward, watch what you buy. As with personal expenditures, ask yourself whether you really need it or can wait. For example, repairs may be less costly then replacing equipment.
2. Pay down debt
As interest rates rise, the cost of borrowing is higher. While the interest may be tax-deductible (there are limits for businesses that aren’t “small”), debt servicing is still a drain on cash flow.
If you have a line of credit, paying it down now will leave you more money available should you need it during a recession. But watch the terms of the loan; if you don’t use it you may lose it.
3. Build up an emergency fund
If revenue slows up, will you have the cash to pay essentials? Employee compensation and benefits? Rents and utilities? Insurance and taxes? While it may not be easy to set aside funds for an emergency, it’s something you should try to do. Whatever cushion you can create will go a long way toward your peace of mind despite recession chatter.
4. Manage inventory
As with other expenses, you always want to carefully manage your inventory so you have enough on hand to meet customer demand, but not too much that you tie up cash. You should:
- Analyze what you have on hand (what’s selling and what’s not). If you use QuickBooks or other software, this should be easy to do.
- Watch for changes in customer preferences (trends in the marketplace impact your re-ordering needs).
- Look for vendors who may offer better pricing or other terms and different items
5. Review your business plan
Again, this is something you should be doing continually and not just once a year. But with recession fears, you may want to do a special review to consider:
- Marketing efforts, which should be maintained during a recession. However, you may want to switch from more costly venues you’ve been using, such as print ads, to social media.
- Employee compensation and benefits may have to be capped. You don’t want to be forced to lay off workers when things get slow. Of course, compensation packages must be weighed in light of the tight job market so you don’t lose who you have.
- Future plans may need to be put on hold. If you’d planned to expand, you may want to pause your plans.
American investor, philanthropist, and former mutual fund manager extraordinaire Peter Lynch said: “You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
This applies to business as well.