How to Prepare Your Business for a Recession
16 min read

How to Prepare Your Business for a Recession

Build a more resilient business using this definitive guide to the 15 actions you can take to prepare for the next recession or global crisis.
How to Prepare Your Business for a Recession

The threat of the next recession or global crisis is a constant concern for business owners. When will it come? How bad will it be? How long will it last? How will I be affected?

All valid concerns. All things you can’t control.

Rather than worry too much about the next recession, the best course of action is to take appropriate steps to prepare your business and make it more resilient. It turns out that while you can’t predict the next economic shock, you can take measures to ensure that when it comes, you will be in the best possible position to survive and thrive.

In today’s post, I’m going to share 15 actions you can take to prepare your business to weather the next economic storm.

Prepare for the Next Recession in 15-Steps

If you only have a short amount of time, here is a quick summary of the steps that will help you prepare your business for the next recession:

  1. Protect your cash flow: Make sure you understand your cash flow situation so you have a good handle on what you need to do to protect your business and take preemptive steps to reduce non-essential costs to shore up your cash flow.
  2. Build an emergency fund: Having a cash buffer can help you navigate unpredictable times. Aim to double your cash buffer. If you currently operate with a 3-month cash cushion, then try to increase that amount to cover 6-months of expenses.
  3. Proactively reduce your debt: It’s important to preserve cash and reduce debt as soon as possible as debt makes businesses vulnerable during a recession. Start with your high interest liabilities and start paying them down while times are good.
  4. Preemptively secure a line of credit: When the next economic shock actually starts, you can be certain that the first thing lenders will do is start tightening lending standards. So secure financing now. You don’t need to use it, but It’s valuable to have it in place before it’s too late, in case you need to use it.
  5. Diversify your revenue streams: Having one product with one revenue model is far less secure than having multiple products with diverse revenue models. It diversifies your business and lowers your risk. Look for opportunities to add new products that target different customers and price points.
  6. Diversify your customer base: Most people would agree that having 150 customers across seven industries is far more safe than having 10 customers in one industry. Audit your current customer list to find areas of strength and weakness. Actively begin to target different types of customers from your main customer base.
  7. Build deeper customer relationships: Use the time to build relationships with your customers. Focus on your best customers first and improve awareness and trust in your business, which will be beneficial for times of crisis.
  8. Strengthen your supplier relationships: You want your key suppliers to stay with you through a recession. Treat your suppliers like you treat your customers. Express your gratitude to them, and make life as easy as possible for them. Better yet, build genuine friendships with your suppliers.
  9. Focus on your core competencies: Consider retreating to the products and services that make your business truly unique and different. The ones that work best. The ones that customers love. The ones that you are really good at producing and marketing.
  10. Maintain your marketing campaigns: Before times are tough, it's important to continue marketing campaigns to attract as many customers as possible. You will have extra cash to store away and more prospective customers to get you through the tough times.
  11. Keep investing in growth opportunities: Don’t automatically cut all spending indiscriminately, your competitors are likely to pull back during a recession and this might be the time for you to pounce. Maintaining your businesses product development, talent acquisition and growth trajectory gives you an opportunity to secure a significant lead over your competitors who may not be taking the same strategy.
  12. Retain your employees: When preparing for a downturn, don’t default to employee layoffs. They are hard to reverse. Use other more creative methods to reduce employee expenses while keeping your staff happy and morale high.
  13. Delegate and automate repetitive tasks: When the next recession rolls around, you’ll need to have as much time as possible to focus on working on your business, and not in your business. Take the time while business is good to delegate and automate the repetitive tasks that take the most of your time with the least impact on your business.
  14. Prepare for the recovery: Protecting your business and continuing to improve is the most productive way to use a recession. I think it’s the only way. You can get upset, complain and blame policy markets. But taking control and preparing is the only way to be successful in the long term.
  15. Don’t panic, be prepared instead: Keep your head on your shoulders before and after a recession. Don’t spend your time worrying, spend your time preparing and planning. It’s hard, but it’s that simple.Please read on for more detail on each of these actions.

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1. Protect Your Cash Flow

Recessions can hammer revenue and profit margins.

The problem is, both happen at the same time. This means that your cash flow can take a mighty hit, with less money coming in through the door and your business keeping less of it.

We all know that cash is the lifeblood of a business. Without it, you don’t make payroll and other vital expenses and you could lose your business.

To survive a recession, it’s essential to plan ahead for ways to protect your cash flow.

The best way to do this is to look for opportunities to reduce cash outflows so you are moving forward and heading into any economic shock in good shape. Here are some ideas:

  • Audit your current spending and cut back on any unnecessary expenses.
  • Shop around for better prices on all your necessary expenses.
  • Talk to your suppliers and vendors to see if they’re willing to give you a more competitive price or more flexible payment terms. For example, you may also be able to negotiate a discount for cash or early payments.

These steps are focused on reducing costs to lower your cash burn. The reason for that is that you can control your costs, and do it relatively quickly. You should also take all other possible steps to improve profits, but these might take longer to have an impact.

Actionable tip: Make sure you understand your cash flow situation so you have a good handle on what you need to do to protect your business, and then take preemptive steps to reduce costs to shore up your cash flow.

2. Build an Emergency Fund

Having a cash buffer can help you navigate unpredictable times.

However, my jaw dropped when I looked at statistics and saw that the average small business with monthly expenses over $10,000 only has enough savings to last roughly two weeks.

Of course it depends on your industry, but the typical rule of thumb is to aim for a cash position that covers at least 6-months of expenses. An emergency fund for if times turn tough.

Building a cash buffer or emergency fund for 6-months worth of expenses is not trivial. It’s daunting. The best way to approach it is to break it down into manageable chunks. Here’s how:

  • Regularly make small contributions to your accounts, this will accumulate over time and crucially, create a valuable savings habit.
  • Automate your savings contributions to put the process on autopilot. Simply set up an automatic transfer to make monthly contributions into a separate account.

The best part is, you’ll earn interest on your deposits. This adds a little income to your business. We all know, in business every little bit helps.

Actionable tip: Aim to double your cash buffer. If you currently operate with a 3-month cash cushion, then try to increase that amount to cover 6-months of operations.

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3. Proactively Reduce Your Debt

In business, debt can build up in subtle ways.

Whether it’s a bank loan, credit card balances, your accounts payable or other liabilities you accrue, they do just that… accrue.

It’s important to preserve cash and reduce debt as soon as possible. Businesses with high levels of debt are especially vulnerable during a recession. Cash flow dries up and it becomes more difficult to make payments.

That’s why it’s vital that when your business is making money, you pay down debt as soon as possible. Business owners that survived the 2008 recession were the ones that were not overly leveraged and so were able to stay solvent during tough times.

Actionable tip: Start with your liabilities that have the highest interest rates attached, and start actively paying down the amounts while times are good.

4. Preemptively Secure a Line of Credit

Don’t wait until you’re experiencing a cash crunch to look for financing.

Preemptively look into securing a line of credit.

When the next recession is on the horizon, you can be certain that lenders are already preparing for it and getting their books in order. When the next economic shock actually starts, you can also be certain that the first thing they will do is start to tighten lending standards.

So secure financing now.

You don’t need to use it, but you can have it secured and ready to go if you need it.

In fact, it’s always a good idea to look for financing before you really need it. The lowest-cost financing, including SBA guaranteed loans, a bank loan, or even crowdfunding, often takes time to secure. It’s a wise move to complete the process before it becomes harder, more competitive, less likely and more expensive.

Actionable tip: Take the time to gather the required documentation and secure a favorable line of credit for your business before it’s too late and lenders get inundated with requests.

5. Diversify Your Revenue Streams

Multiple revenue streams can help your business if the economy takes a turn.

Having one product with one revenue model is far less secure than having multiple products with diverse revenue models. It diversifies your business and lowers your risk profile.

Having multiple streams of revenue means you are serving different customers and offering them a choice of different price points, which makes your revenue more immune to shocks.

For example, if you run a dine-in restaurant you can add a twilight menu, catering services or a takeaway option to add new revenue streams. Online businesses could add digital or physical products, affiliate programs, a membership, advertisements or consulting services.

You don’t want to be caught with all your eggs in one basket. Regardless of the economy, incorporating multiple revenue streams into your business will help you have as many options open as possible. This flexibility could be a lifesaver.

Actionable tip: Recession-proof your business by looking for opportunities to add new products at different price points to build multiple revenue streams for your business.

6. Diversify Your Customer Base

Customer concentration is a big risk to some businesses.

Most people would agree that having 150 customers across seven industries is far more safe than having 10 customers in one industry.

This is especially true during a recession.

In an economic downturn, some customers will be more impacted by others. For example, financial services, construction and real estate companies got hit particularly hard during the global financial crisis in 2008. In 2020, it was the hospitality and travel industries that copped the brunt of the impact.

A diverse customer base with different types of customers will naturally provide a hedge for your business against an economy that disproportionately impacts only a certain sector. While some customers may have to buy less from your business, others will be in a position where they can continue to buy. Or maybe even buy more.

This reduces your risk and means your business will be better placed even if one group of customers unexpectedly starts to struggle.

Actionable tip: Audit your current customer list to determine your areas of strength and weakness. Actively begin to target different types of customers from your main customer base, ones that might not all be affected in the same way during a financial crisis.

7. Build Deeper Customer Relationships

Now is the time to focus on strengthening customer loyalty.

Do it before the economy turns, not after. It’s possible now as customers will have the time and headspace. This might not be true when a recession hits.

Why focus on customer relationships? Simple, it costs more to acquire new customers than to maintain existing ones and loyal customers are more likely to stick with you.

This is true even at the best of times. But, during a recession, customers reduce their spending and it’s even harder to attract new customers. So, investing in the customers you already have becomes even more important.

Sign up new customers now so you head into uncertain times with them on your customer list, and then start working on building loyalty with each customer.

To improve customer relationships you can:

  • Show your appreciation by expressing your gratitude to customers with handwritten and personalized thank you notes.
  • Creating discounts and reward programs for returning customers.
  • Talk with your support team to learn what issues they hear about most. Let your customers know that you’re prioritizing fixing those issues. Then do it.

Basically, think of ways that you can make a meaningful, positive difference for your customers.

Building rapport with your customers is a good strategy to ensure retention and have more stability during a recession or economic downturn. The relationships you build with your customers as you navigate difficult times together can build lifelong customer loyalty.

The best part? Happy customers act as advocates for your business and share their experience with other potential customers, in turn helping you to draw in new sales at a lower cost.

Actionable tip: Use the time to build relationships with your customers. Focus on your best customers first and improve awareness and trust in your brand, which will be beneficial for times of crisis.

8. Strengthen Your Supplier Relationships

You want your key suppliers to stay with you through a recession.

If your suppliers prioritize other customers of theirs, or reduce their level of service to you then it can cause serious disruptions to your business.

You might have been able to keep all your customers, but without the required supplies you won’t be able to deliver your products and services to them and generate revenue.

That’s why it is vital to constantly work on your supplier relationships.

The approach is simple. Treat your suppliers like you treat your customers. Express your gratitude to them, and make life as easy as possible for them. Better yet, build genuine friendships with each of your suppliers.

This is a win-win. Your business will be in a better situation with suppliers, and it will be more fun as you engage with suppliers and build meaningful relationships with them.

Actionable tip: Draw up a list of your key suppliers and your main contact at each supplier. Then think of one thing you will do for each person, sending them a note or gift, inviting them for dinner or a drink, or offering a business perk.

9. Focus on Your Core Competencies

Your core competency is what you’re really good at.

Every business has at least one, most have several. It’s likely a part of your core product or service. It is what will carry you through a recession.

For example, for a coffee roaster their core competency is sourcing the best coffee beans and then executing on the process to roast them for local customer tastes. If times are about to get tough, a coffee roaster should be focusing on their roasting business customers and coffee sales. Heading into a recession is not the time to be sinking money into a food offering that is secondary to their coffee.

There are times to invest in new or secondary offerings, but if you feel like a recession is on the horizon then now might not be the time. Doubling down on what works is a surer bet. Focus on areas where you are confident you will get a return on your investment.

Consider retreating to the products and services that make your business truly unique and different. The ones that work best. The ones that customers love. The ones that you are really good at producing and marketing.

Actionable tip: Before the going gets tough, refocus your business on your core competencies, or what you do well. This is what will drive you through a recession.

10. Maintain Your Marketing Campaigns

There is no more important time to stay relevant and front of mind with customers than heading into and during a recession. That’s because there are a lot of things for your customers to consider during a recession, and your business might not be one of those things without your intervention.

Try your best to maintain your marketing budget so that your business stays relevant to your customers. There might even be opportunities to get discounted marketing rates during a recession as others pull their budgets. Consider focusing your efforts on:

  • Regularly communicating with customers via email, phone, post or in-person.
  • Following up with prospects who haven’t yet converted into customers.
  • Checking-in on past customers that haven’t been heard from in a while.
  • Placing online ads and retargeting ads to draw in new customers.
  • Running contests, sales, or events.

In doing this, keep your messaging simple and relevant to customers. Make sure you are sympathetic to their situations, especially if an economic downturn is hitting them particularly hard. This might mean you’ll need to change some of your marketing campaigns. But the effort will be worth it.

Just make sure that your customers and prospective customers don’t forget about you.

Actionable tip: Before times are tough, it's important to continue marketing campaigns to attract as many customers as possible. You can earn extra profits to store away, and you will have more prospective customers to get you through the tough times.

11. Keep Investing in Growth Opportunities

Don’t have a knee jerk reaction and cut back on product development, hiring and growth before you have given it the appropriate thought.

Now I know in Point #9 I said that you need to cut side projects and focus on your core competencies, and now I’m telling you to keep investing. I am, but I’m suggesting that you keep investing in your core competencies.

Picking up on the coffee roaster example, this means investing more in the coffee roasting business if good opportunities come up. Perhaps it’s buying a struggling competitor that adds new products and customers to your stable, picking up onto your staff an expert roaster who’s just moved to the country or investing more in sales to bring in new customers.

Maintaining your businesses product development, talent acquisition and growth trajectory gives you an opportunity to secure a significant lead over your competitors who may not be taking the same strategy.

Take the time to step back and calmly consider what you want to do.

Actionable tip: Don’t automatically cut all spending indiscriminately, your competitors are likely to pull back during a recession and this might be the time for you to pounce.

12. Retain Your Employees

If you’re thinking about doing layoffs to prepare for a recession, pause now.

You should probably look beyond layoffs to cut costs in preparation for a downturn.

Layoffs aren’t just harmful to workers and morale, they’re costly for business owners as well. While layoffs might be a short-term solution, when the market recovers you’ll have to rehire and retrain employees which can cost significant time and money. The cost of hiring new employees is over $2,000 and the cost of finding and training new managers is over $15,000.

It’s a good reason to pause and reconsider layoffs as a recession proofing strategy.

Remember, layoffs aren’t the only way to cut labor costs. To survive a recession, you can consider reducing hours and introducing employee furloughs. Cutting down on employees expenses instead of employees is also a great way to save money when your business is strapped for cash.

Actionable tip: When preparing for a downturn, don’t default to employee layoffs, use other more creative methods to reduce employee expenses while keeping your staff happy and morale high.

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13. Delegate and Automate Repetitive Tasks

When the next recession rolls around, you’ll need to have as much time as possible to focus on working on your business, and not in your business.

It’s the difference between day-to-day operational tasks, and big picture items like retaining key customers and signing up new ones. You’ll need to be executing the high-level strategy and making tough decisions.

It’s impossible to complete those necessary high-level tasks if your schedule is filled with productivity-stealing mid-level tasks. If you’re preparing for a recession or in a recession now, it’s time to start delegating and automating. Here’s how:

  • Map out all the activities and tasks you need to complete.
  • Determine how often each task is completed and much time it takes.
  • Assess what tasks can be delegated to your employees.
  • Determine if there are cost-effective automations that can be used to complete repetitive tasks more efficiently than you or your staff.
  • Carefully delegate and automate the appropriate tasks.

As a leader, your time is one of your business’s most valuable resources. Make sure you reserve it for the tasks that will deliver the biggest positive impact on your small business.

Actionable tip: Take the time while business is good to delegate and automate the repetitive tasks that take the most of your time with the least impact on your business.

14. Prepare for the Recovery

The next recession will inevitably arrive.

When it does, keep working and stay disciplined. Keeping your mind while others are losing theirs might end up being your superpower.

History has told us that markets eventually recover from all shapes and sizes of downturns. If you can continue day-to-day operations diligently and quietly make improvements to your business then you will come out stronger.

Basically, you should keep working to improve your business during a recession, so that when the recession is over, you are able to grow and take new opportunities that come up.

You’ll be able to pick up customers from competitors. You’ll be able to launch new products to a market that is bouncing back. You might even be able to acquire competitors.

Protecting your business and continuing to improve is the most productive way to use a recession. I think it’s the only way. You can get upset, complain and blame policy markets. But taking control and preparing is the only way to be successful in the long term.

Actionable tip: Create a plan and course of action for how to bounce back from a recession and build your business to be stronger. It can even help you add some control to what can feel like an uncontrollable situation.

15. Don’t Panic, Be Prepared Instead

This is probably the most important point in this post, and I will keep it the shortest.

Your mindset is important.

We all know that recessions are inevitable. We all know that they also eventually end. They are a natural part of the business cycle, and business owners need to take the good with the bad.

Keep your head on your shoulders before and after a recession. Don’t spend your time worrying, spend your time preparing and planning. It’s that simple.

Actionable tip: Stay rational and stay calm, take the steps required to prepare your business for all economic environments - good and bad - and you will be in good standing.

Final Thoughts

Running a small business during a recession is challenging.

But a recession doesn’t have to spell the end. You just need to make sure that your business is agile and flexible so that it can adapt to and thrive in the economic downturn. If you plan and execute well, then keep your focus, you can recession-proof your business and come out of the downturn stronger on the other side.

Don’t wait, take positive steps forward while times are good.

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