How to Recession-Proof Your Small Business

Posted By

As we all continue to work through the COVID-19 crisis, it makes sense to think about the future and what it may bring. The economy never stands still and, just like business, it’s either growing or shrinking. In the future, there will certainly be boom times and recessions. It makes sense to think about how you might handle future economic changes while the current crisis is, in many ways, still in progress. 

How to recession-proof your business

With a little planning, you can prepare your business for future downturns and changes in the marketplace so that you’re as prepared as possible for what will inevitably come. Here are nine ways you can proactively recession-proof your business.

1. Have a business plan

The foundation of any contingency planning is to start with a good baseline plan that forecasts your best guess for how things will go in the future. Don’t worry, this isn’t the time to try and predict future downturns. Instead, this plan should be for the status quo. It should predict the growth that you’re planning for, barring any unforeseen changes to the economy.

A complete, written business plan is not necessary for this part of your preparations. Just focus on building a financial forecast that includes a Profit & Loss, Cash Flow, and Balance Sheet. Ideally, ensure that your forecast is fully interconnected so that changes to your revenue in your P&L automatically impact your other financial statements. Having a forecasting tool to help you can be useful at this stage.

You should also document your business strategy in a simple format using a one-page business plan

2. Experiment with different scenarios

With your financial forecast in place, you can experiment with different financial scenarios to see what happens to your cash and profits in different situations. You should experiment with a slowdown to your entire business as well as slowdowns to specific revenue streams. In each scenario, explore how you might react to the drop in revenue by forecasting a reduction in spending. 

What spending can you easily trim? What spending is required to keep the doors open? Working through different scenarios will help you think about the changes you might need to make to your business to keep it afloat.

3. Focus on cash flow

As you experiment with different financial scenarios, keep an eye on what happens to your cash flow. Are you able to keep enough cash in the bank in different situations? What changes to your financial forecasts do you need to make to keep your cash stable? This is where having interlinked financial forecasts is very useful so that changes to one part of your forecast are automatically reflected everywhere el
se.
In addition to experimenting with hypothetical cash flow scenarios, it’s helpful to focus on your current, real-world cash flow and build good habits while things are going well. Spend time ensuring that your customers pay you on time and build systems to keep your accounts receivable under control. If possible, it can also be helpful to build a cash cushion.

3. Investigate a line of credit

Building a cash cushion, or some form of “rainy day fund” isn’t always easy for businesses. Most businesses spend much of their cash reinvesting into the business to fund additional growth. In this scenario, consider opening a business line of credit to use as a cash cushion. Ideally, you won’t use this line of credit unless you absolutely need it and it will cost your business very little to maintain it, only incurring interest and fees when you borrow from it. 

4. Tie marketing spending to revenue

A helpful budgeting strategy is to tie certain spending to revenue. What this means is that instead of creating a specific budget for something like marketing, you instead forecast that spending as a percentage of revenue. Using this method, you can keep spending in check if sales start to decline or automatically ramp the budget up if sales are better than expected.

You can use this tactic with more than just marketing. Many variable expenses (unlike “fixed expenses” such as rent) can be tied to revenue so that budgeting is more automated.

New call-to-action

5. Establish a plan review cycle

Even if you’ve taken the time to do all of the above steps and have a robust financial forecast with different scenarios, it won’t be much help unless you regularly review your plan and track your progress against it.

The best way to do this is to use a financial reporting dashboard so that you can easily generate reports and see if you are meeting your sales goals and keeping to your spending budget. Schedule a monthly review meeting to go over your numbers and then adjust your forecast based on how your business is performing.

In a financial crisis or any time that there is significant change and uncertainty in your business, you should increase that review cycle and check your numbers more frequently. Like other tips on this list, it’s best to put these systems in place when things are running smoothly so you don’t have to scramble to build a good reporting system when you’ve got lots of other things going on.

6. Consider different target markets

Diversification is a great strategy for handling downturns in your business. For example, during the coronavirus crisis, many high-end restaurants expanded into the takeout market as well as shifted towards lower-cost offerings, targeting a different customer base than they would have traditionally targeted. 

Many restaurants also moved to offer meal kits and other family dining options. Interestingly, many of these restaurants have kept these newer offerings as things have reopened because the new lines of business diversified their offerings and actually ended up expanding their revenue opportunities. 

7. Explore different pricing models

As you look at selling your products and services to different types of customers than you traditionally serve, you should also explore different pricing options. Different approaches to selling can unlock new business and make your products and services accessible to customers that may be hesitant to commit during times of uncertainty. 

For example, you could consider renting products instead of selling them. You could explore selling smaller and cheaper versions of your service, or potentially unbundle services so that they are a la carte. Another option that can lower the up-front cost to customers is a subscription model instead of offering just a one-time purchase.

8. Build strong relationships

During an economic downturn, relationships are more important than ever. If you need to defer a rent payment or take a little longer to pay a vendor, it will be much easier if you have established, trusting relationships in place. Like some of the other tips here, work to cultivate those relationships before a crisis hits so that it’s easier to ask for favors when you need them.

Don’t forget your relationships with your customers. Building solid relationships during good times will help keep them with you when times are tough. People are people after all and they will work with the businesses that they know and trust.

9. Be prepared to pivot and diversify

While this may seem like the most obvious tip, it’s worth stating anyway: you need to be prepared to take your business in a new direction if there are dramatic economic changes. You may need to change your business completely and it’s worth taking the time to think about that.

Thinking about pivoting to a new line of business doesn’t have to be an all-consuming effort, though. It’s just about brainstorming “what-if” scenarios and thinking about new lines of business that you could enter if the world suddenly changed. If you’re a dry cleaner who does alterations, what would you do if people suddenly stopped wearing more formal clothes? 

Maybe you could pivot to cleaning outdoor gear and equipment and doing repairs. If you run a business that builds scheduling software for yoga studios, what do you do if people stop going to in-person yoga? Maybe you build a tool that lets yoga teachers live stream their classes.

Make crisis planning easier

Managing your business through a significant economic downturn or a change in business climate is stressful. There’s no doubt about that. But, you can make it easier on yourself by doing some planning and having the right systems in place. Significant changes in your business are always hard, but if you keep your head up and look for new opportunities, you’ll find that your business will survive and thrive.

Noah Parsons
Noah Parsons
Noah is currently the COO at Palo Alto Software, makers of Outpost and the online business plan app LivePlan, and content curator and creator of the Emergent Newsletter. You can follow Noah on Twitter.
Posted in Growth & Metrics