How to Prepare for the Next Recession

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Predictions for a recession have risen in the past few months. Well-known company executives, including Tesla’s Elon Musk, predicted a recession to begin in early 2023, lasting at least 18 to 24 months. The CEO of JPMorgan Chase, Jamie Dimon, has a similar forecast, advising that a recession will begin in the next nine months.

News of a recession often sparks fear among small business owners. However, those that prepare for a recession are more likely to survive.

How Small Businesses Can Prepare for A Recession

Consider the following advice by Benjamin Franklin, Founding Father of the United States “By failing to prepare; you are preparing to fail.” By failing to plan for an economic downturn, you are planning to fail. Furthermore, by failing to plan, you are giving your competition an opportunity.

Secure Funding Now

During a recession, sales slow down, and so does cash flow. However, waiting for that to happen to get funding is risky. Banks are less likely to increase your organization’s credit line during a downturn, and vendors may tighten their lending terms. In addition, investors usually hold on to their cash, so finding someone willing to make an equity investment may be challenging.

You can mitigate this risk by obtaining funding before the anticipated recession begins.

Review Cash Flow Regularly

Cash flow represents your business’s incoming (income) and outgoing (expenses) cash over a specific period, like a month or quarter. During a recession, cash is king. We always want a net positive net cash flow. During a recession, it becomes crucial because it allows you to build up cash reserves and reduces the need to potentially dip into savings to support the business through a downturn.

During a recession, you should keep a closer eye on your cash flow so that you can quickly remedy any issue.

Evaluate Expenses

When income is down, the next natural step is to cut expenses. While cutting the most expensive line items saves the business the most money in the short term, it may hurt the business in the long term. How do you know what to cut and what to keep?

Create Key Performance Indicators (KPIs) for each expense. KPIs give each expense any easy-to-understand value, which makes understanding which expenses your business needs to keep versus which it can cut easier.

Maintain Strong Relationships with Customers

Maintaining solid relationships with key customers is critical at all times. However, during a recession, it becomes even more important. Competition becomes tighter because the pool of money is smaller. Clients who don’t feel that a business values them will leave and go to a competitor. This means that your business could be hurt by a lack of repeat business after the recession, which extends the effect of the recession on your business.

Plan for What’s Next

Recessions are market corrections that typically occur every ten to fifteen years. (In fact, the U.S. has experienced thirteen recessions since WWII, and some have been more severe than others.) Have questions about how to plan for your business to outlast the predicted recession? Contact us to speak with our experienced business advisors.