Planning ahead is key for managing the impacts of a recession. Discover steps you can take today to make your business more resilient and continue building on your success in a challenging economic environment.
Over the course of your business journey, you will face various economic challenges and realities as you build toward new growth. Some—such as budgeting for supplies, inventory, and payroll—are easier to anticipate, while others—such as unexpected equipment maintenance—are not. One of the more serious challenges your business could encounter is an economic recession. While the emergence and severity of a recession can be hard to predict, there are strategies you can implement to help prepare and protect your business.
What Is a Recession?
By definition, a recession is a period of economic decline. Some common characteristics of a recession include increased levels of unemployment, decreased manufacturing output and retail sales, as well as a negative gross domestic product (GDP).
In addition to identifying characteristics, it’s important for your business to be aware of common signs that suggest a potential recession could be on the horizon. Movement in the markets is one of the biggest indicators for business owners to observe. Sudden declines in the stock market or the Leading Economic Index—a key metric for forecasting future economic activity in the U.S.—could signal an impending recession. Other signs can be harder to quantify, but are still important to keep in mind, such as a decline in consumer confidence. While no one can predict a recession with absolute certainty, knowing some of these common warning signs can help you prepare for an economic downturn and even mitigate the financial impacts of a recession on your business.
How Does a Recession Impact Small Businesses?
While a recession impacts businesses of all sizes, small businesses are often particularly vulnerable. As a business owner, you rely on consistent sales and on-time payments from customers to keep up with your costs. Decreases in consumer spending power during a recession can result in reduced sales and slower-paying clients, which can have a major impact on your working capital. With less cash on hand, it can be difficult to pay your suppliers and keep up with rising operating costs. And maintaining your current staffing levels can be challenging if your finances are tight.
A recession can have a major impact on your growth plans, but there are steps you can take to continue building toward your goals in a challenging economic climate. Preparing in advance—before you find yourself in a cash crunch—and proactively bolstering your financial resilience can pay dividends for your business when times get tough. Read on to discover four strategies you can implement today to protect your business.
What Are Some Strategies I Can Use to Protect My Business During a Recession?
One of the key strategies business owners should keep in mind during and in the lead up to a recession is to build up their working capital. If you take steps to manage and forecast your cash flow effectively and leverage available resources to access the capital your business needs, you can better handle—and maybe even avoid—the major effects of a recession.
1. Apply for a business line of credit.
Don’t wait until you start to feel the pinch of a recession to apply for assistance. Lenders are less likely to provide a business line of credit if they think your business is in financial danger. By obtaining a business line of credit early on, you can use it to keep your cash flow flush when you need it.
2. Build up cash reserves.
Having a healthy savings account can help provide peace of mind for your business. It can also be a valuable financial resource to account for rising costs or unexpected expenses. Prioritize expenditures that are crucial to your business, and think about delaying any major, non-essential capital outlays in a down economic climate so that you can have more cash on hand for your company.
3. Line up alternate suppliers.
If your regular suppliers are affected by the recession, it’s important to have backup options. This will ensure you get the materials needed to keep your business running. Having alternate suppliers could also be helpful should your regular suppliers raise prices more than your budget can handle.
4. Monitor customer accounts to ensure they are not delinquent.
As a business owner, it is important to keep your customer accounts current. Customers paying their bills on time will, in turn, enable you to pay bills on time. This will help your business maintain strong credit and support good relationships with your suppliers.
How Can I Make My Business More Resilient During a Recession?
Keeping your business in the black is crucial for making it through a recession. The following steps can help to make your business more resilient.
1. Pay off debts to improve cash flow.
If you foresee a potential economic downtown on the horizon, prioritize paying down debts that your business may owe. Having any amount of money tied up during a vulnerable time could put your business at a disadvantage. The absence (or reduction) of debt payments could not only ease your business’s cash flow, but also reduce your stress level.
2. Diversify your customer base.
Expanding your customer base is a great way to increase sales—and therefore revenue—coming into your business. Take the time to analyze your existing customer base and identify any opportunities you may have to reach untapped market segments.
3. Strengthen customer relationships.
While expanding your customer base is key, it’s equally important to remind your current customers of the products and services—and most importantly, the value—that you offer. Focus your energy on addressing their needs and consider new promotional efforts like limited time offers or loyalty rewards programs to connect with your customers during a challenging time and lessen the likelihood that they take their business elsewhere.
Protecting Your Small Business From a Recession
If you’re not prepared, a recession can have a major impact on your small business. Fortunately, there are ways that you can prepare your business for the road ahead and manage financial challenges as you pursue new growth opportunities for your business. Working capital is essential, and taking steps in advance to reduce your debt, build up your financial reserves, and diversify your suppliers can all contribute to a strong, healthy cash flow for your business when you need it most. It’s also important to focus on your customers—they feel the impact of an economic downturn too, and strengthening your existing relationships while looking for new opportunities for customer acquisition can lead to sustained success in the face of adversity.
For additional tips and advice on how you can make your business more resilient in any economic environment, contact a Santander Small Business banker today.
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