Recessions & What Business Owners Can do to Prepare

Recessions hit all business owners a little differently. Some businesses are recession-proof by nature. For businesses like NEST, when recessions come and layoffs are high, more and more people find they can turn to us for help, advice, and direction. In difficult economic climates, financial advisors can really show their value.But for typical businesses that are more affected by consumer demand, recessions can be tough. With job security in question, unemployment going up, and the dollar not stretching as far, people tend to not buy as much. That can lead to a domino effect which can be detrimental to businesses — especially if they haven’t been strategic in preparations.For Austin business owners, we have a few tips for how you can help your business survive and thrive through a recession. 

1. Get a bookkeeper and check your cash flow

Every business should have a good bookkeeper. If you don’t have one, we highly recommend that you remedy that.In order to understand the financial health of your business, you have to run projections every month, or at least every quarter. Using a bookkeeper helps you accurately understand what money is coming in and going out. As a business owner running things, it’s hard to monitor the health of your business day by day. Having a good bookkeeper with an eye on what you’re bringing in and spending, can give you a detailed view of what’s working month over month which helps you adjust as necessary.They can also give you the data you need to examine your cash flow. You have to know what’s coming in versus what’s going out. Let’s get honest here — if you have more going out than coming in, and no way to bring more in, that can mean the end of your business. However, if you see you have an issue, you can look at real strategies for improving things: 

• Cut back on spending.
• Renegotiate vendor agreements.
• Explore credit options.

2. Cash and credit

Cash is king. You have to have some cash available in order to do business. Just as in personal finance, you want at least six months of your business expenses put away or accessible. And whether that’s your own cash or a line of credit depends on your unique situation. It’s important to make sure that you either have that cash available, or if you have a credit line, it’s still open.It can also be helpful to have more lines of credit available in the form of a loan against your business, an extension of an existing credit line, or even against your home. Having these at the ready is helpful, even if you don’t end up using them. It’s helpful to know they’re there if you need them.On average, recessions last eighteen months. During that time, business may slow. Having cash or credit available can be the difference between slowing and stopping altogether. 

3. Tighten your belt

Just as with personal finances, when the economy goes into recession, it’s time to start looking at where you can cut expenses. Ask yourself what things you absolutely have to do business as opposed to what’s a convenience. This is a good conversation to have with your bookkeeper, who can give you insights into your cash flow. You can start doing this even before we’re officially in a recession. If signs are pointing to a time of slow growth, act as though recession is imminent. It’s best not to wait until you reach a critical point. 

4. Run lean

Layoffs are always a hard decision. But it's harder on your business to continue to pay for labor you don’t need. Think about this: you brought employees on because you had a certain level of business coming in the door. But when that level of business stops coming, you no longer need to be spending that much. It’s simple math.Employees are a crucial part of your business, but they’re also an expense. We love our employees, but we can’t keep them on the books, giving them more to do when there’s no work to be had. If you do, you’re putting the whole business at risk. When it comes down to it, it’s better to lay them off and allow them to get unemployment. Making tough decisions might allow you to run the business longer. And if you maintain a good relationship, you might be able to rehire them when things start picking back up.Obviously, you don't want to lay off people if you still have the business to provide for them. Layoffs aren’t the place for preemptive cuts.But if the work is no longer there, then it's time to make those tough decisions and figure out how to run things leaner. 

5. Keep advertising

It might seem counterintuitive, but during a recession, it is especially important that businesses stay on people’s minds, remain visible, and attract customers. That means that while you’re looking for places in the budget to cut spending, you should probably skip over the marketing line. You have to make sure you can keep your business going, so when the economy recovers, you're able to continue that momentum. Despite recession, businesses should still budget for marketing and creating a strong online presence in order to stay on customers’ minds. You might see other business owners scaling back on marketing. Great! That means you can take advantage of this opportunity to increase people’s awareness of your business and stand out from the crowd. Here are some ideas to get started:

• Update your website, ensuring it is inviting and easy to navigate.
• Create content that adds value to customers’ lives.
• Post on social media consistently and engage with followers.
• Send regular emails to customers on your mailing list.
• Follow up on leads.
• Place ads online to draw people back in.
• Place online retargeting ads to draw prospects back in.

6. Invest in your existing customers

It costs a lot more to get new customers than it does to maintain existing ones. They were with you in the good times, so make sure that your established customers know how much they’re appreciated, especially when times are tough. How? It’s all about relationships, which we hope you focus on building even during the best of times. But when recession strikes, it is especially important. Just like your business, people are looking for ways to cut down on spending. That makes it even harder to convince new customers to give your business a try. But established customers know your brand, they know you, and they’re more likely willing to make a line for your business in their budget. Now is the time to solidify those relationships:

• Prioritize fixing common issues.
• Deliver exceptional customer service.
• Offer incentives.
• Adapt your services and products to customers’ changing needs. 
• Reach out to previous customers to invite them back. 
• Treat them with respect.

7. Excel and Adapt

Your business has strengths that your established customers have come to trust and rely on. If you have a niche or a strength that is uniquely yours, lean into that. Keep doing what you do best. A recession isn’t necessarily the time to change course. Though diversification can be a good thing, when the economy is slowing down, adding new products or services might not be the protection you intend. If you venture onto untried and untested ground, you’re inviting the opportunity for vulnerability. There’s an opportunity cost for change — doing something new equals less time and resources from your established strengths. Try to focus instead on what you do best — then improve it. However, it’s important to remember that after recessions, especially long-lasting ones, things often change. Pay attention to your business model, and honestly assess if you need to make adjustments to compete in a changed economy. If there are outside factors that affect your business (and there are), it’s time to do some reflection. The economy is always in a state of flux as it moves through the different stages of the business cycle. If that happens, make sure that you’re able to adapt to ensure that your business avoids becoming a casualty of change.  

8. Don’t wait for recession to be official

You don’t want to wait for the National Bureau of Economic Research to officially declare recession before you start preparing. As of publication, the markets have dropped 20-30% and inflation is at a 40-year high. You can read the writing on the wall. There’s always a delay between living in a recession and the official declaration of one. By the time NBER has all the data to make it official, your business could have lost months. So, don't wait until it’s official. Start planning now.  If you’re a business owner and you'd like to chat with fellow business owners (who also happen to be financial advisors) about the coming economic downturn, why now schedule a no-obligation call with us? We’ve been at this for nearly 30 years, and we’ve got the experience, tools and knowledge to help your business thrive in any economic environment. Reach out to us at info@nestfinancial.net.  Find us on:LinkedIn  Facebook  Yelp  TwitterDISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.