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Are you worried that the country is headed into a recession? You’re not alone. Many financial analysts predict that recession could strike within the next year or so. In fact, many entrepreneurs and consumers are convinced we’re already in a recession. On the other hand, some strongly reject the possibility of a recession in 2022 or any time in the near future. Andrew Hunter, a senior U.S. economist, is on this optimistic side of the divide. In June’s Employment Report, he wrote, "The strong 372,000 gain in non-farm payrolls in June appears to make a mockery of claims the economy is heading into, let alone already in, a recession.”
Who is right - is the recession coming, already here, or just a buzz? Judging from this debate, it’s clear no one can tell for sure. But as an entrepreneur, you should always be ready for anything — recession or otherwise — and that’s what this article is about. Read on and learn how to prepare your business for the unforeseeable economic turmoil and financial uncertainties.
What is a recession anyway?
Only the National Bureau of Economic Research (NBER) can declare a recession, which it defines as a countrywide decline in economic activity lasting more than a few months. Since World War II, the U.S. has gone through 13 major recessions, the most recent being the 2020 COVID-19 recession. From these accounts, we can get a pretty good picture of what a recession looks like. Moreover, we can compare the indicators of an actual recession to the current situation to see if there’s any cause for worry.
The NBER considers a multitude of complex economic metrics when labeling recessions. Here are some of the common signs of recession that are relatively easy to read:
- Soaring inflation: Consumer prices rose 9.1% over the last 12 months ending June 2022 — the highest increase since 1981.
- Shrinking Gross Domestic Product (GDP): The country’s GDP fell 1.5% in Q1 2022, the first GDP drop since the 2020 recession.
- Declining real income: On average, real hourly earnings decreased 1% between May and June 2022.
- Rising unemployment rate: While the unemployment rate holds steadily at 3.6%, there are still 5.7 million Americans seeking jobs.
- Plummeting stock market: Multiple reports suggest that the stock market is not doing as well as expected.
So far, most of these indicators do not look good. Perhaps the possibility of a forthcoming recession is not so farfetched after all.
How to survive recession
Businesses, mainly SMBs, take the hardest knocks in times of recession. Regardless of what causes the recession, small businesses always get caught in the devastating aftermath. The top problems for SMBs during recession include:
- Scarcity of raw materials and products
- Low customer purchasing power
- Unfavorable shifts in market dynamics
- Changes in trading regulations
- Talent shortage
- Limited access to external business financing
- High tax and interest rates
- Severe disruption of business activities
Unfortunately, recessions are inevitable. They are, in fact, a staple of the global economy. The best you can do as a small business owner is to prepare your enterprise to handle anything a recession throws at it. To that end, here are six tips for surviving recession:
Keep the cash flowing
Cash flow is the lifeblood of a thriving business. Whether in a recession or not, it’s always important to protect the cash flow. Keep those numbers in the green by being frugal with your business expenditure and maximizing cash inflow. To do this, find and eliminate any bottlenecks in the cash flow, such as delays in invoice payments, unnecessary expenses, low sales volumes, and slim profit margins.
Build a cash reserve
Ensure you have a cash reserve or financial cushion with enough money in it to sustain the business for at least six months. Don’t think of this money as sitting idly in a bank account, but as a crucial safety net to keep the business afloat during tough times. Besides, a financial cushion doesn’t have to be hard cash; it can be in the form of highly liquid assets or a reserved line of credit.
Recessions can obviously extend beyond the six cushioned months; the Great Recession of 2008 lasted about three times as long. But that’s okay because the cash reserve is not meant to see the business through that entire period. Its purpose is to keep the business going as it comes to terms with the situation.
Diversify your revenue streams
A diverse offerings portfolio means the business would continue to make money even if one or more supply lines or market segments crashed. Ideally, diversification refers to having multiple independent product or service lines.
However, most niche enterprises cannot manage more than a few distinct offerings. But they can still expand their few offerings to target multiple market sectors at the same time. For instance, variation of the same product/service can serve particular demographics, regions, or classes of buyers. This would still effectively widen the market scope and diffuse logistical risks.
Focus on business agility
Business agility is the ability to quickly adjust an organization's culture, business model, strategy, or governance in order to take advantage of emerging opportunities or cope with sudden disasters. In other words, business agility means rolling with the punches and making the most of what’s handed to you (good or bad).
Agility is the one thing that defines business survival during a recession. And not just survival. With enough agility, you can actually turn the situation around in your favor. For instance, many small businesses that pivoted to new offerings and working models in the last recession emerged stronger and more profitable. Also, in a KPMG survey on business resilience, 67% of CEOs said agility was the new business currency.
Nurture your business relationships
The success of any business depends heavily on its relationships with stakeholders, suppliers, partners, creditors, employees, and customers. The strength of these relationships can play a huge role in seeing a business through tough times, sometimes making all the difference between survival and failure.
Think about it — loyal customers will probably still buy from you even if the prices go up. Dependable creditors may still finance your business despite a struggling financial market. And long-term suppliers will likely prioritize your orders amid material shortages.
Manage debt carefully
Debt is a sensitive matter in an economy facing recession. Firstly, the impact of the recession might make it challenging to service outstanding debts. Secondly, lenders are understandably reluctant to extend business financing in a straining economy. In the worst of times, even banks struggle to keep money in circulation.
It’s generally good practice to settle debts as quickly as possible and maintain relatively low debt utilization and debt-to-income ratios. More so, when times are lean to preserve creditworthiness for much-needed financial assistance.
Conclusion
It's no use losing sleep over a recession that might never come. Instead of debating the odds of an economic turmoil, why not direct that energy to recession-proofing your business? The beauty of doing so is that you win either way. Should a recession strike, you’ll be more than ready for it. And if it never happens, your business will remain culturally and financially strong from all that prepping.
Speaking of financial strength, how strong is your cash flow support structure? Recession or not, you should never hesitate to seek business funding when in need. Besides, your business survival strategy might depend on handy financial backing. Luckily, Lendzero is here to help you find the right funding solutions for your business. Lendzero is an online platform that presents you with dozens of pre-qualified, pre-negotiated financing offers from multiple lenders at the touch of a button. All you have to do is sign up to enjoy this convenience.
