How Small Business Owners Can Prepare for a Recession

My Post (13)A recession guide to help you be prepared, not panicked…

You’ve heard this before, but it’s true: small businesses are the backbone of our economy. Though small businesses are small, they are mighty. They generate 44% of economic activity in the U.S. And small businesses are extremely vulnerable to economic recession and disaster — 25% don’t have enough cash to make it through a two week downturn.

If your business feels unprepared for the events that have occurred over the last few weeks, know that you’re not alone. Even the most robust business planning likely doesn’t include planning for a global pandemic.

Whether your business is struggling because it’s been forced to close or your regular flow of customers has vanished, cash flow is most certainly top of mind. How can you stay afloat until we get a clearer picture of what the full impact of what COVID-19 will be? This guide will help you prepare for a recession, hopefully without panicking.

Focus on Your Cash Flow

Cash flow is king, but especially during a recession. During good times, cash flow may not have been your priority. With enough money coming in (and no global pandemic in sight), you probably didn’t have to watch your books too closely to ensure you didn’t run out of money.

A lack of focus on your cash flow can make tough times scary. According to a survey conducted by JP Morgan Chase, the average small business holds 27 cash buffer days in reserve. That means that an average business can continue to meet all of its cash outflows (rent, labor, utilities, etc) without earning any money for 27 days. But of course, not every business falls within this average.

Because cash is so important to keeping a business afloat during tough times, including recession, it’s time to do your best to make whatever cash reserves you have last as long as possible. Some key things to do now include:

  1. Collect your receivables: When times are good it’s easy to let your receivables stretch a little longer than they should. Maybe your net 30 somehow slid to net 45 or even net 60. That’s not going to fly anymore. Follow up on any that are past due and collect your receivables now. Consider adding late payment fees to further incentivize prompt payments.
  2. Double check your payables: This is another one that is easy to not do when times are good and you are busy. Look at all of the payables you have outstanding and when they’re due. Double check all totals to ensure they’re accurate. And if necessary, stretch out the payment to the due date.
  3. Review your books: If you haven’t been running your business with a strict budget, now is the time to start. Start by looking at your current expenses. Cut any unused subscriptions or services: trade publications, a stock photo subscription. Challenge yourself to find creative ways to cut an expense, without impacting your business. Don’t ruthlessly cut everything, but it’s time to trim the excess.
  4. Contact your lenders: If you know that you’re going to struggle making your loan payments during a recession, get ahead of this now. Contact your lenders to see what leeway they may be able to offer you. Ultimately, they’d rather work with you on your payments that see you default.
  5. Negotiate with vendors: What are your current terms for paying your vendors? If you pay upon receipt, it might be worth asking if you can pay net 30 or even net 60 to get you through the next month or so. Your vendors may not say yes (after all, they’re probably dealing with their own cash issues), but you won’t know until you ask.

Get Creative to Weather a Recession

While your primary business may be suffering, is there an opportunity to expand to serve customers in a different way? Breweries in Oregon, left without the ability to serve customers onsite for the foreseeable future, have turned to starting home delivery services. Their loyal fans get craft brews that they can’t find in the grocery stores. – Read more

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