Is a recession coming in the U.S.? Are we already in it? Economic recessions in the U.S. are usually defined as two consecutive quarters when economic activity, measured by the gross domestic product (GDP), shows negative growth. Currently, opinions are whether the U.S. is in a recession or not are mixed.
Some economists think we aren’t, pointing to a robust labor market and a low unemployment rate. But many consumers think we are. Interest rates are rising, affecting financial markets and making everything — from mortgages to credit card debt — more costly.
Consumers feel hammered by a 40-year inflation-high at more than eight percent. That means the costs of goods and services are considerably more expensive than last year — and supply chains have been challenging for businesses across industries. It’s no surprise that all of this adds more pressure on economic activity for both consumers and businesses. Both are affected by rising inflation, climbing interest rates, and a choppy stock market.
The stock market has fallen more than 20 percent this year, the definition of a bear market. And in some industries, such as travel and restaurants, may have yet to fully recover from the downdraft created by the COVID-19 pandemic. Folks working in those types of industries may face more difficulty during a shaky economy.
Consumer expectations, of course, play a crucial role in increasing the chances of a recession. If consumers tighten their wallets due to inflation, they spend less — and these reduced expenditures can cause a negative business cycle. For example, if a family cuts out pizza Fridays to rein their food budget, pizza restaurants may feel the pinch — facing declining sales and profits as a result.
So, what can businesses — especially in riskier industries — do to prepare for a recession? And should all current small business owners be worried?
Facing the Possibility of a Recession
With all the “doom and gloom” news, many aspiring and current business owners may fear the future of their businesses. But don’t panic yet! There’s no reason to necessarily feel scared as a current or aspiring small business owner for several reasons.
First, recessions occur fairly frequently over a period of time. Most recessions last roughly two years or less. Ultimately, they end — and economic expansions begin again.
Small business owners should consider recessions as expected parts of the economy. It’s common to face multiple economic downturns, or recessions, throughout business cycles. And having a strategic plan to see your business through recessions when they occur is critical. The further you plan ahead, the better!
Second, the effects of a recession vary widely according to your industry and sector. You may already have a recession proof business. For example, if you own an auto repair business, people will still need to repair leaky radiators, oil changes, and regular car maintenance. In fact, your business may even grow because car owners put off new vehicle purchases during the recession. But if you run a manicure salon, you may be more affected by an economic downturn. People may forgo more luxurious self-care practices and do their nail care themselves.
While some industries — like auto repair — may experience a cash surplus during recessions, all industries should be prepared for challenging economic landscapes. No matter your area of business, you’ll want to ensure your business is recession-ready — and has a plan in place for the possibility of future recessions or negative economic conditions.
What Makes a Recession Proof Business?
Generally, recession proof businesses provide goods and services people must have. Recession proof industries will still have economic activity in downturns and include medical care, sellers of food and beverages like grocery stores, baby products, utilities, and more.
But businesses that provide goods and services people enjoy — but can live without — may be more affected. People curtail their disposable income for services and products they can do without during an economic downturn. Restaurants, travel, self-care, leisure activities, and similar industries can be negatively affected.
Third, recessions can present business opportunities. Good workers may be laid off and need a new job. If you’re hiring, that can be good news. Competitors may struggle, potentially improving the competitive climate for future growth. You can also use rocky economic times as a spur to strategize new methods of offering your goods and services. A nail salon, for instance, can pivot to educational videos or host webinars, showing consumers a wide range of the most famous manicure designs and offering professional nail-care tips.
A recession will happen eventually, whether in the near term or the long term. What you need to face a recession is calm thinking and a plan to make your business as safe from recession as possible!
Is your business considered “recession proof”? Check out our Top 10 Recession Proof Businesses!
5 Tried and True Strategies for a Recession Proof Business
How to Get your Business Recession-Ready
Implementing a Recession Proof Business Strategy
So, what steps can you take to create a recession proof business strategy? Of course, you’ll first want to make sure that your financial statements (balance sheet, cash flow, income statements) are in order. This helps you track any recession effects in terms of cash flow and profit margin. You’ll want to focus on your business’s most important key performance indicators (KPIs), such as profit and profit margin, sales, and customer retention.
Then, think about which of these strategies below would work in your business and industry! Here are the five tried and true recession proof business strategies:
Need help making a balance sheet — or want a free balance sheet template — for your business? See How to Make a Balance Sheet in 5 Easy Steps.
1. Strategically Reposition the Business
One of the best recession-fighting tools is to reposition your business strategically. If you have a business-to-consumer enterprise, consider planning to turn it into a business-to-business one (and vice versa).
Let’s say you have frozen yogurt stands in local malls. Your business may be vulnerable to a downturn in consumer spending triggered by a recession. But could you sell your most popular flavors to other businesses instead? Could your clients be grocery store shoppers or party planners rather than passersby? After all, people will still shop at grocery stores — and people will still like frozen yogurt!
Whether you’re in the business of frozen yogurt or not, you can take steps planning to maximize profits elsewhere and expand your customer base.
You can also consider strategically repositioning other business elements than your goods and services. For example, can you strategically reposition your terms to be more advantageous to clients? If you traditionally have offered three-year contracts, the flexibility of one-year contracts may be very welcome in a recession. To strategically align your business, examine its current — and potential — cash flows. Keep reading to learn about how you can create multiple revenue streams to increase your cash flow!
As part of strategically aligning your business, it’s also a good idea to build an emergency cash reserve to keep your business running for at least six to 12 months. In a recession scenario, it’s best to have a minimum of a 12-month cash reserve.
To build a cash reserve, you’ll want to track your profit margin and operating cash flow to build a cash runway for your business. In other words, ensure you optimize working capital to strengthen your cash positions — and build a bank of funds your business can rely on during economic downshifts.
Downsizing is a tried and true strategy that has worked for many businesses in many recessions. The hard truth? If your sales and profits fall, downsizing can help you cut expenses.
You may reduce your product line-up, make fewer products of the same type, work with fewer people or even close certain areas of the company, temporarily or permanently.
It would help if you had a specific and concrete plan for downsizing. If you offer many different products, separate those that may weather a recession from those that might not. Remember, the key to that is your client’s “must have versus want to have” profile.
Other factors to consider are the relative economic resiliency of your clients themselves. Your customer base’s economic profile matters, but it’s particularly important during a recession. If your clients have long-established businesses in a recession proof sector or are wealthy, they may not feel the impact of a recession. But if they’re people on a fixed income, earning modest incomes, or a business whose products customers can do without, they may have to do significant tightening during a recession. That can affect your sales and profits.
3. Create multiple revenue streams
In a recession, a business that relies on one revenue stream may be quite vulnerable, especially if it’s not in a relatively recession proof business industry. That’s why it’s crucial to plan diverse revenue streams!
Let’s say you own a cosmetics company, for example, with a bricks-and-mortar footprint — and you’ve noticed your customers aren’t only interested in cosmetics. Maybe your clientele is also interested in fostering a healthy lifestyle. Can you diversify your business into a hybrid model offering online skincare and wellness sessions? Can you add other products, such as facial masks or moisturizers?
Offering a variety of products and services creates multiple revenue streams for your business, allowing more cash flow opportunities. And if one of those streams fails, you’ll have cash flow backups!
But what’s the quickest way to create another revenue stream? Repackage and repurpose! Repackaging is the process of taking an existing product or service and giving it a new look or purpose in a different package. It could be as simple as repackaging your products into smaller sizes and selling them to third-party vendors — or repackaging your existing content into online courses. So, start examining your current products and services to consider how to make them more appealing to a different demographic. You may be surprised how simple creating another revenue stream through repackaging can be.
4. Take a Client-Centered Approach
If you want to repackage or strategically reposition your business, you should consider checking in with your customer base first. What products or services do they love the most — and which are unfavorable? What do your clients need and want from your business?
By surveying and talking to your clients, you’ll gain insight into which services and products to focus on, repurpose, or remove altogether. And the results will also help you plan a business roadmap based on your client’s interests, needs, and desires.
Ready to become a master client communicator? Get started with our Top Five Effective Methods to Boost Client Communication!
5. Outsourcing business functions
Outsourcing business functions is an integral part of recession strategizing for several reasons. First, outsourcing necessary functions such as payroll, accounting and taxes can reduce expenses.
Second, outsourcing these areas can decrease the chances of costly errors. Rules, regulations, and laws about payroll, accounting, and taxes are complex. It takes a lot of work — and extra time — for an individual business owner or sole proprietor to keep up with all of them. Penalties and fines can be steep if rules, regulations, and laws aren’t followed. Using qualified outsourcing companies can ensure that your business is compliant, saving you costly fines and time.
Third, many business owners, particularly new ones, try doing it themselves. Some may try to assign specific tasks to a few trusted employees. But because these functions are complex, they are also time-consuming for someone unfamiliar with compliance rules and regulations. Poor payroll, tax, and accounting management can negatively affect most central business functions, such as strategizing and selling.
Assessing your business to see if any main business functions, such as payroll, accounting, and taxes, can be outsourced is a good idea. And it can be the perfect solution if you need reliable and cost-effective employees for recurring tasks, such as customer service. Plus, outsourcing paper-pushing tasks — like payroll — can help you streamline your business and save time.
Overseas Business Processing Outsourcing (BPO) teams can handle a wide variety of tasks skillfully at considerably less cost, including virtual assistants, customer service, sales development, bookkeepers and accounting, social media managers, graphic designers, web development, and project managers.
Did you know you can streamline your business, overcome common business challenges, and save valuable time using payroll services? Learn more in Payroll for Small Business: How to Streamline your Business and Save Time.
Guidant Can Help
If you’re a business owner — or aspiring to become one — you’ll always need a recession-ready plan for your company. Recessions come and go. But businesses who plan and pivot when needed stay. So, think about what possible recession scenarios your business could face. And build a set of strategies to keep your business going, no matter the economic landscape.
If outsourcing is in your recession strategy, we can help! Guidant has helped over 30,000 small businesses launch — and we cater our services directly to support small business owners like you. Our Payroll Services and Guidant Bookkeeping and Tax Services can help you streamline your business, saving on time and unnecessary costs.
And if you’re looking to hire employees — without breaking the bank — our friends at the Doxa Talent Agency can help you find the high-quality and reliable talent you need.
At Guidant, we’re passionate about empowering small business owners from financing to supporting the lifetime of your business. Contact us today at 425-289-3200 if you’re looking for financing solutions or inexpensive business services tailored for small businesses!