When running a business for any length of time, you’ll discover the need to prepare for recessions and economic downturns. They are simply a regular macroeconomic occurrence. The US alone has endured 14 official recessions since the Great Depression—averaging approximately one recession every six years.
Since 1960, 21 of the World’s advanced economies have been in recession only 10% of the time. So, despite recessions making headlines, they don’t tend to last that long, and economies continue to grow.
But, that’s the macro perspective, and recessions still inflict real suffering on people and businesses. Thankfully, understanding the warning signs and proper recession planning can alleviate that pain and set your business up for success.
What is recession planning?
Recession planning is a form of contingency planning focused on the specific economic impact of a recession. A recession plan includes a financial forecast that reflects changing economic conditions and detailed changes your company will make to marketing, sales, and production strategies in response.
You’ll typically be preparing for rises in unemployment and decreases in spending—specifically discretionary spending. However, every business is impacted differently, so necessary adjustments won’t be the same for everyone.
Some businesses—“dollar” stores for example—may see increased demand during a recession, while others have fewer customers come through their doors. Other effects to take into account include rising costs and changes in interest rates.
What are the signs of a recession?
No one metric can be used to predict a recession. Economists have documented many different patterns that may signal a potential downturn, such as changes in the unemployment rate, the price of assets, and the usage of business and consumer credit.
According to the IMF, changes to some variables—such as certain interest rates, consumer confidence, and unemployment—can have some utility when trying to predict recessions. However, they provide little insight into a recession’s potential severity in terms of length and overall impact.
For small business owners, the most useful thing to keep an eye on is any change in customer behavior. If customers’ buying and shopping patterns are changing, it’s time to take notice and prepare for more change. Since every business is impacted by recessions differently, taking lessons from previous recessions can be helpful as you look toward the future.
Why should you prepare your business for a recession?
When times are good and the economy is going strong, it’s easy to ignore the fact that every period of economic growth is followed by some form of correction and a possible recession.
Remember, if history is any guide, recessions are cyclical. While they are hard to predict, they will come. The form of the recession and how it will manifest itself will likely be unknown, but paying attention to the economic news and customer buying patterns can provide an early warning.
Here’s how a little preparation can help you and your business during a potential recession:
Planning ahead helps you understand what changes you intend to make when the economy takes a downturn. With an established plan, you’ll be able to simply execute it. No worrying about what decisions you’ll make and if they are the right ones in the midst of everything going wrong.
Proactive planning provides the time to think through different financial and strategic scenarios in a low-pressure environment without having to take immediate action. When the time comes to put the plan into action, you’ll be able to calmly make the decisions that need to be made. All because you’ve already thought through the scenario and the necessary changes.
If you don’t have a plan in place, you’ll spend the early days of a recession trying to figure out what to do instead of putting a plan into action. If you have a plan at the ready, you can immediately start making changes to your business without having to spend additional time planning, potentially giving you a jump-start on your competition.
Avoid unnecessary risks
Without a plan, it’s easy to make reactionary, knee-jerk decisions. You may not have the time or the focus to think through all of the ramifications, potentially exposing your business to escalating risk. If you have a plan, you’ll have already thought through how different decisions might affect your business and picked a strategy that minimizes risk.
How to prepare your business for a recession
Recession resistance is all about planning – both financial and strategic planning. It’s about thinking through different financial scenarios, the actions that you will take, and seeing what the impact is going to be on your bottom line and your cash flow. Here are the steps you need to take to create a recession plan for your business:
1. Create a recession forecast scenario
To do this, you’ll first need to think about how a recession might impact your business.
- Are consumers going to buy more or less of your products during a recession?
- Are they going to buy different products than they usually buy?
- Will they buy in different ways—paying over time instead of upfront, for example.
If inflation comes with a recession, how will your business handle it? Start creating your financial scenarios by making a list of the changes that you think are coming—these will be what we’ll call the “recessionary impacts” on your business.
Now, make the appropriate changes—based on the list you just made—to your financial forecast. For example, if you think sales of certain products will slow down, reduce your expected sales for those products and see what profits and cash look like because of this change. Once you’ve completed one scenario, create another financial scenario with different changes and once again see what the impacts might be.
The next step is to write down the changes your business will have to make from a strategic perspective. Will you change your staffing or how you spend your marketing budget? What other expenses will you adjust or even cut if sales slump? These changes will comprise your strategic plan for handling a recession.
Of course, you won’t predict the future perfectly. The point of this exercise is to think through different potential futures and understand the changes that you would make when the economy changes.
If you’re looking for a tool to make forecasting and scenario planning easy, check out LivePlan.
2. Focus on your cash flow
As you create different financial scenarios for your business, it’s important to look beyond profits. Instead, focus on your cash flow and projected cash balance. After all, a business can’t function without cash in the bank, so it’s important to know ahead of time if you might lack the cash on hand needed to operate.
Having a cash flow forecast as part of your scenario planning can help you spot potential problems well before they become actual problems.
If you anticipate cash flow problems in the future, you need to do something about it now. That might mean opening a line of credit, even if you don’t need it right now. Creating this kind of safety net is something that you can do more easily when times are good. When times are bad, your attention will automatically shift to day-to-day work that keeps your business going, and leave very little time for proactive planning.
3. Review ongoing initiatives
It’s been said that it’s better to have a mediocre strategy executed well, rather than a series of brilliant strategies executed poorly. This is even more true during times of uncertainty. It’s better to stay focused on doing what’s core to your business as well as you can and avoid unnecessary distractions.
If a recession hits, think about adjusting your goals and staying as focused as you can. Limiting the projects that you take on and executing those projects at a high level will likely lead to better results. If you spread yourself thin across multiple projects, you’ll find that none can be completed at a high level.
4. Understand your customers
Understanding your customers is always vital for running a successful business. Serving your customers well is at the heart of business growth. It’s important to understand not only what they need today, but what they’re looking for in the future so that your business can grow and evolve with them.
Your customers are also your best view into how a coming recession will affect your business. As a business owner, you’ll have a front-row seat into how their buying decisions are changing. You may see your customers pulling back and taking longer to make a purchase decision, or cutting back on add-ons and extras that they may have quickly purchased before. That information provides the insights you need to guide your strategy for weathering a potential recession.
Customer decisions will be the core of any business changes that you make to weather a recession. Pivoting to meet the needs of your customers as they feel the impacts of a recession will not only help you survive but could actually help you thrive. For example, perhaps you can introduce lower-cost products or services that meet your customers’ changing needs. Or, offer a la carte services that you previously bundled together into a single offering.
5. Focus on employee growth
Aside from your customers, your employees are one of your biggest assets—they’re the ones who will actively work with you to navigate a recession. Use their knowledge of your customers and your business to help develop your strategy and elevate how they can contribute to your business at a strategic level.
By inviting your employees into strategic discussions, you are helping not only your business but your employees as well. You’re opening the door to build their skill set and knowledge of your business which will only help you more in the long run.
6. Keep long-term business performance in mind
At the start of a recession, the natural reaction is often to just go into survival mode. And, while that might be necessary for your business to survive the recession, you also want to keep the long-term in mind. Remember that most recessions don’t actually last that long and that there will be an end to the economic downturn. If you can get your business to a place where it can survive decreased sales and overall demand, it’s time to start thinking about the long term.
While you wanted to make sure you had a recession plan in place before a recession actually started, you also want to have a recovery plan in place for the eventual return on increased spending and consumer confidence. You’ll want to think about how your business will be positioned for those changes and how your customers will perceive your business as it evolved during the recession.
7. Revisit your plan and financials consistently
The most valuable thing you can do to survive a recession is keep your forecasts alive as the world changes. Keeping your forecast updated will give you the best visibility into your future cash and profits as sales and expenses shift.
Ideally, you’ll review your performance monthly. You’ll take a look back at the past month and review sales, expenses, and other cash spending. You’ll review accounts payable and accounts receivable to make sure your customers are paying you and that you’re paying your bills. You’ll see how you performed compared to your forecast and then adjust your forward-looking forecast to account for current customer behavior and your best guesses about the future.
This ongoing review and revision of your plans and forecasts will ensure that you stay healthy and that you spot problems early so you can take action.
Start preparing for uncertainty now
While a few businesses can find that they are “recession-proof”, the typical business will face decreasing demand, potentially increasing costs, and other headwinds. Preparation can make all the difference. Spending time working through best and worst-case scenarios, and planning how you might react will only increase your business’s chances of not only survival but potential success during a recession.
Take the time to plan, review the plan regularly, and revise the plan as go and you’ll find that you’ll be able to navigate the rough waters and come out the other side stronger than you ever thought possible.
See how LivePlan can help you more easily explore the future of your business with easy-to-update forecasts, multiple scenarios, and a robust business dashboard to simplify your performance analysis.