Running a business is tough. The last thing a business owner wants to deal with is a drop in revenue from an external economic factor – such as a recession.
It seems like a recession is outside the control of the business – so there’s nothing the business can do in a recessionary environment except wait for brighter days, right?
Your business needs to be prepared in order to withstand a recession. You may not know this, but there are already a number of precautionary measures you can take to recession-proof your business, enabling it to survive any economic downturn.
Ready to learn more? Let’s dive in.
What Exactly is a Recession?
The first thing you need to do to protect your business from a recession, is to actually understand what a recession is. This will allow you to calculate a rough timeline as to how long the recession will last, and which economic indicators will impact that timeline.
A recession is generally defined as two consecutive quarters of negative GDP growth, according to the textbook definition. However, it’s important to note that the official declaration of a recession is often made much later than the actual start of a recession.
This is because lagging indicators, such as unemployment rates and industrial production, are used to determine if we are really in a recession. For instance, the NBER declared a recession on December 1, 2008, which actually started one year earlier in December 2007.
Just because we’re not currently in an officially declared recession doesn’t mean we’re not in an actual recession. Issues with the banking industry and inflation in particular would indicate that, no matter what, our economy is not in a good place.
In today’s rocky economic environment, it’s necessary for businesses to adopt this mentality to protect themselves and secure their future.
By understanding the nuances of a recession, your businesses can make informed decisions to recession-proof its various operations.
What Makes a Business Recession Proof?
There is no foolproof way to recession proof a business, as economic downturns can affect almost every industry in some way. However, there are certain strategies you can adopt to reduce their vulnerability to recessions and increase your businesses chances of survival.
The following are several examples:
- Essential Goods and Services: Businesses offering essential goods and services that are necessary for consumers, regardless of the economic situation, such as utilities, healthcare, and food, typically perform well during a recession.
- Low Pricing: Businesses providing low-cost products or services can be more attractive to consumers during a recession when financial constraints are high. For example, book publishers tend to do all right in recessions because books are an inexpensive gift.
- Revenue Diversification: Businesses with diverse revenue streams or customer bases are less vulnerable to the negative effects of a recession on a particular sector or demographic.
- Strong Financial Position: Businesses that have a robust financial position before a recession are better equipped to manage the crisis and potentially capitalize on opportunities that arise. Much of this deals with treasury management and preparation long before a recession kicks off.
- Adaptability: Businesses that can quickly adapt to changing market conditions and consumer needs are more likely to survive and even thrive during a recession.
- Niche Markets: Businesses that cater to niche markets or offer unique products or services may have a competitive advantage during a recession.
If your business doesn’t check many of those boxes – don’t panic. Here are four actions any business can consider to help them better prepare for a recession.
Think You Might Need Funding? Lock-in Capital Before It’s Needed
While there are various strategies your business can employ to mitigate the effects of an economic downturn, one proactive approach could be to lock in capital before it’s needed.
By securing funding in advance, your business can avoid a situation where it needs financing but is unable to obtain it due to a tightening credit market.
This option would increase the financial flexibility of your business. By having cash reserves on hand, your business can adapt to changing market conditions and maintain day to day operations during a period of reduced revenue.
There is also a competitive advantage that it provides.
Businesses that have secured funding in advance are better positioned to take advantage of opportunities such as expanding into new markets, retaining employees, and maintaining a certain quality that your customer base has come to expect.
Securing funding proactively can offer clear advantages. Nevertheless, there is a potential downside.
Depending on the type of funding secured, there may be costs such as interest payments and fees. These costs can eat into your business’s profits and must be carefully weighed against the potential benefits.
Securing funds for your business may carry additional risk, contingent on the funding terms. For example, if you obtain financing through debt, it is important to ensure that you can fulfill your debt obligations, even if revenue decreases.
If your business is unable to meet its obligations, it could even lead to bankruptcy.
No matter which funding option is best for your business, having a solid business plan in place is crucial. This demonstrates to lenders and investors that the business is a worthwhile investment and has a clear strategy for growth and profitability.
To determine whether or not this is a good strategy for your business, consider exploring a break-even analysis exercise in order to quantify the cost – and the potential benefit.
Should Companies Pay Off Debt – or Save?
Determining whether your business should focus on paying off debt or saving funds is a complex decision which depends on several factors.
A key factor to consider is your business’s current financial situation. If you’re generating healthy revenue and have sufficient cash flow to cover the daily expenses, prioritize paying off high interest debt.
This can help you save money over the long term by avoiding expensive interest charges. Let’s dive into an example to illustrate how this works.
Say that your business has a credit card balance of $20,000 with an interest rate of 18%. You are making the minimum monthly payments, but it seems like you are barely making any progress in paying off the debt.
By continuing to make the minimum payments you would end up paying $25,758 in interest charges alone over the course of 10 years.
Now let’s assume that you have a surplus of $1,000 each month in cash flow. By allocating this surplus towards paying off the credit card debt, you could pay off the balance in just under two years and save $11,580 in interest charges.
With that in mind, if your business is facing financial difficulties, has limited cash flow, or a low interest debt – it may be more beneficial to focus on building up savings instead. By creating a financial cushion, you can better handle unexpected expenses or a sudden drop in revenue.
If You Can’t Pay Off Debt, Consider Debt Consolidation
Juggling multiple debts with varying interest rates and fees can be challenging. That’s where debt consolidation comes in as a potential solution. This process involves combining all of your debts into a single, more manageable payment.
It is a viable option for small businesses struggling to keep track of multiple payments or those seeking to lower their monthly payments and interest rates.
One of the biggest benefits of debt consolidation is that it simplifies business debt involving multiple creditors as you only need to make one payment per month. This can help your business avoid missed or late payments which would help with accruing additional fees.
Additionally, consolidating your debts can help you secure a lower interest rate, which can save your business money in the long run.
There are also some potential downsides to debt consolidation that you should be aware of. One potential downside of debt consolidation is the risk associated with a secured loan.
If you choose to consolidate your debt with a secured loan, you will be required to put up your assets as collateral. This means that if you fail to make your payments on time you could lose those assets.
Also keep in mind that some debt consolidation loans do come with fees or higher interest rates than your current loans. Shop around and compare options before making a decision to ensure that you are getting the best deal possible.
Don’t rush into any decision without first weighing the pros and cons of each available option.
Have Excess Capital? Consider Investing It
Investing is a strong option to consider if your business has extra capital. It might sound counterintuitive to what we previously discussed but it could end up being a smart move.
If invested correctly, those funds could lead to gains that your business could use to come out even stronger following a recession.
Just like with anything else, you have to learn and understand what sectors of the market would do well in a recession. Take some time to look at some sectors of the market that you think would fare well. If you’re struggling to come up with any, bring your attention to what is essential.
Things like food, personal care items, utilities, and healthcare are the sectors known to perform comparatively well during economic turbulence. These industries hold strong and some even tend to do better in a recession due to their necessity.
Let’s think of health care as an example. This sector of the market is typically seen as recession-resistant, as people will always need medical attention regardless of the economic situation.
Investing in healthcare can be particularly lucrative during times of crisis, as demand for medical products and services tends to increase.
With that being said there are several industries that fare well during a recession. Taking the time to fully understand the basic principles of stock analysis and learning chart patterns can be helpful in making informed investment choices.
You don’t need to be an investing guru – but getting a grasp on the basics of technical analysis is a must. At the end of the day learning the fundamentals of the stock market will help you realize how powerful of a tool it can be – even in terms of securing your business’s future.
Using your treasury to recession-proof your business can provide a crucial lifeline in times of economic uncertainty.
By carefully managing your cash flow, investing in profitable opportunities, and building up a reserve of emergency funds or paying off the right debt can help you safeguard your business against the negative impacts of a recession.
While it may require some sacrifice and discipline in the short term, the benefits of preparing your treasury for a potential downturn can be the deciding factor if your business makes it or not.
The key to surviving a recession or any unexpected crisis is to prepare and always be ready. With the right amount of effort your business can navigate even the toughest financial challenges.
Don’t let a crisis catch you off guard – take a proactive approach and set your business up for success in the long run.
Author Bio: Shane Neagle is the editor-in-chief of The Tokenist, a financial media publication with the overarching mission of making the opaque world of finance more understandable, accessible, and digestible for all. This essentially means he reads, learns, and writes about finance – all day. His interest in finance stems from studying philosophy, which provided him with a new perspective on the concepts of money, credit, and debt.