Let’s start here: the United States is currently not (technically) in an economic recession, which is defined by two consecutive quarters of negative growth in the gross domestic product (GDP). But there are justified fears of a recession looming. The US economy shrank by a rate of 1.4 percent in the first quarter of 2022, meaning another negative quarter would land us within the technical definition. While not all economic recessions are the same, there are some elements that businesses would be wise to prepare for.
Small businesses can be particularly vulnerable to the effects of recession because they usually do not have the same resources to weather the storm. Large corporations are not insulated, but they can leverage political and financial connections for loans, bailouts, and if all else fails, they can issue more public stock. Small businesses often need to be more resourceful to survive and prosper. This post will explore the most common effects of a recession on small businesses. And in the spirit of a healthy main street, we’ll cover some of the ways to prepare.
Supply Chain Issues
One of the most common problems businesses face during a recession is disruptions to their supply chain. The (brief) recession of 2020 already brought this issue to the font of many small business owners’ minds. There are a number of factors that can disrupt your supply chain—COVID-related lockdowns have been a primary cause in recent years. Increasing oil and transportation costs are wreaking havoc in 2022. Legislation and trade policies are constantly evolving and can also play a role. Every small business will experience supply chain disruptions if they’re in business long enough.
So how can you deal with supply chain issues and disruptions? It’s more important than ever to understand your inventory and manage it efficiently—even if your small business only houses it in one or two locations. Try to build relationships with multiple suppliers. Even if you’re not working together now, there may be opportunities down the road. Try to expand your network of suppliers and partners, because the businesses you rely on today can experience hardships as well. Some disruptions come out of the blue, but some are a direct result of legislation or newsworthy dominos. Pay attention to what’s going on in your industry to stay ahead of the supply chain issues as much as possible.
Reduced Consumer Spending
Another effect of a recession is that customers cut back on spending, which can lead to reduced sales for businesses. Uncertainty about the future, concerns about job security, and higher cost of living can all cause reduced spending.
While you can’t inject more disposable income into the economy, you can track your income trends and prepare for customers with tighter budgets. Look for places to trim expenses to keep your cash flow healthy.
And of course, you wouldn’t be in business in the first place if you weren’t creative enough to drive more revenue. So re-evaluate your market opportunities, come up with some new marketing strategies, and prepare to get as scrappy as you were when you launched your business. You’ll need to fight hard for those dollars during an economic downturn.
Accounts Receivable (AR) / Unpaid Invoices
Small businesses count on customers paying their bills even in a healthy economy. This is far more likely to become a problem during a recession. Outstanding collections are one of the most painful effects of economic downturn. Businesses often fail to prepare until their cash flow is in dire straits.
As consumers have less money to spend, they’re also less likely to pay their bills on time. This can create a domino effect, where businesses have less money to operate and are forced to make difficult decisions due to cash flow issues. To combat this, consider offering discounts for early payments or generate cash flow with financing for invoices or recurring revenue.
Better yet, streamline your income management processes with technology, including efficient follow-up processes and predictive insights on all of your accounts. Optimize your small business to successfully collect payments at a time where they’ll be harder to come by.
Credit Conditions
As lending activity slows and interest rates fluctuate, small businesses can have a more difficult time securing the financing they need to maintain operations or invest in growth. This can make it harder to weather the storm during tough economic times.
It’s almost impossible to insulate your business from higher interest rates and more difficult conditions to secure capital. But like the previous conditions, you can prepare.
First, build your business credit. If cash flow is healthy, pay your debts on time and work with partners that report to credit bureaus. Second, refinance debt when opportunity presents itself—especially if there are signs that interest rates are about to increase. And third, use incentivized spending. Even if you’re running lean, you’ll likely continue spending on business credit cards. If you can pay them on time and get something back, you’re gaining a financial advantage.
A recession can be a difficult time for small businesses, but with careful planning and preparation, your business can weather the storm. Pay attention to changes in the economy and how they might affect your business, and take steps to protect your cash flow. You should also consider low-cost ways to invest in your business during a recession. Historically speaking, businesses that emerge from economic downturn are poised to grow stronger than ever.
