Financial Education

How Small Business Can Prepare for an Economic Slowdown

Savvy business owners know the best time to prepare for a recession is before things begin to go bad. This approach will allow you to act with intent and not find yourself in a position to respond to circumstances completely beyond your control. With a little careful planning and strategy, you will be able to strengthen your business for survival during a recession.

Maintain a Cash Reserve

One of the first things to happen when a company fears an oncoming recession is that they begin to slow down on paying invoices. They also need their customers to settle invoices sooner. This will eventually affect the availability of cash for your business. During a recession, this will make business survival unlikely.

The process for building a cash reserve is simple enough but will take a good amount of discipline to complete. You should stash a little money away whenever possible until you feel you have enough to maintain business operations for a few months during an economic downturn. The existence of a cash reserve is also useful in the event of other potential threats to your business.

Net 30 Terms

You will be able to conserve some money by paying suppliers on net 30 terms and longer if the supplier will allow. Most suppliers will grant you these terms if you have a good history of payment with them. The proper time to request this term is when everyone in the business world is doing well. Suppliers will be less likely to wait for their money when business climates are more difficult.

Protect Creditworthiness

Your credit will take on new significance to the health of your business during harsh economic times. You might need more credit from the vendors you work with while waiting for money from slow-paying customers. You may also need to apply for a small loan for a business during this period. Approval will hinge on creditworthiness. However, do not borrow any more than is needed to avoid adding unnecessary financial burden to your company while you ride out a dip in the overall economy.

Trim Current Spending

It is a good idea to examine your operating costs from time to time in search of unnecessary expenses. You should outsource any business functions that are not essential to your business. This will make these functions simpler to eliminate when a recession hits.

Do not outsource functions that are vital to the day to day operations of your business. The functions that need to be outsourced will vary from business to business but it is always a good idea to keep functions that give you a competitive edge in house.

Make Inventory Management a Priority

A warehouse filled with inventory that is not selling is not a good thing in the best of economic times. But during a recession, it will probably mean doom for your business. A good system for inventory management and tracking will help you order more of the products that sell in a timely fashion and avoid wasting money on products that are not selling.

Freeze New Costs

Business owners are understandably more willing to take on new expenses when the economy is strong. However, during economic downturns, it is important to only spend money when absolutely necessary.

Grow Client Base

It will be difficult to survive during a recession if the majority of your revenue originates from a handful of customers. Do not underestimate the effect bad economic times will have on your customers. A recession will cause some of them to pay slowly or drop off altogether. You should have a client base that is diversified enough that your business will survive if you lose a few customers that are important to you.

Final Thoughts

As a business owner, you should begin to protect your business from the potential dangers of a recession long before one is on the horizon. This will keep you from acting with desperation when an economic downturn happens. The seven tips above will benefit you greatly in your efforts to protect your business against the effects of a recession.