It’s no understatement to say that 2020 has posed significant challenges. With the introduction of an unexpected pandemic, we’ve all had to rearrange and reimagine our lives, most especially small business owners. COVID-19 has overwhelmed our newsfeeds, our personal lives and, ultimately, our finances. For small business owners who’ve been trying to survive the new guidelines, lockdowns, and changes in income for almost a year now, this pandemic has been particularly difficult.
With so much happening today outside of our control, it’s important to take hold of the things that we can steer, and getting financially fit in a down-economy is one of them. Here’s a list of five actions that small business owners can take to get – and stay – recession-proof.
1. Understand Where Your Money is Going
Recession or not, it’s smart to know your numbers if you’re running a business. However, during a recession, your margin of error is much narrower, so it becomes even more crucial to know where you stand.
Having up-to-date bookkeeping and monthly statements means that you’ll always know exactly where your business stands financially. Being as informed as possible at all times means that you’ll always be well-equipped to handle whatever may come. Additionally, knowing where your money is going will help you catch any overspending or areas where cost-cutting is possible.
If you’re juggling multiple bank accounts and need some extra help with your cash flow, using a daily cash flow dashboard such as Mint, which is free, could make all the difference. Apps like this allow you to easily move between bank accounts so that you’re able to track all of your money coming in as well as all of your money going out. Using helpful tools like this means no second-guessing or questioning whether your business is on firm financial footing. Instead, you’ll know where you stand with the tap of a button, which is important during financially uncertain times.
2. Do More with Your Assets
If we look back to the recession of 2008, studies show that businesses who did the most with their assets were most likely to survive. In particular, this study done by researchers at Villanova University and the University of Lisbon showed that “improving returns on fixed assets has the highest impact on operating profit, followed by gains from increasing returns from intangible assets.”
So, while making the most of your assets is always encouraged, it is especially important during a recession. Here are four tips to help you do just that:
- If you have excess inventory, clear your stock with a promotion or big sale.
- If you have excess cash, think of ways to re-invest that money into your business.
- If you have clients who are behind on payments, or you have lots of accounts receivable on the assets side of your balance sheet, it may be time to have an awkward but necessary discussion about paying their invoices.
- If you have a nice office space or warehouse, consider renting it out for photoshoots. Platforms like thisopenspace provide ways to do this safely and professionally.
3. Offload Your High-Interest Debt
Once you feel comfortable that you’ve maximized your assets, it’s time to look at your debt and interest payments.
A study done by researchers at MIT and NYU looked at thousands of companies that failed during the last recession and found that the one thing these companies had in common was that they had a lot more debt going into the downturn than the companies that survived. This is because having more debt requires more cash so that you can meet the principal and interest payments. It’s crucial to stay on top of your interest payments no matter what the economy is like, but it’s especially necessary during a recession.
So, how do you keep interest payments from getting away from you? It can be helpful to prioritize your debts from highest interest rate to lowest rate and begin paying of your high-interest rate debts first. That way you can stop them from accumulating and, consequently, you’ll save more money in the end.
4. Don’t Be Reactive; Take the Long View
The best way to respond to a recession is to not respond at all. Instead, focus on running a healthy, efficient, profitable business. In other words, small businesses are better off doing what they should already be doing: watching for overspending, making sure they have a financial cushion, and keeping their eye on the long-term.
If you’re a small business owner worried about a recession, you’re not alone. Aim to position your business to withstand a year of negative growth. This will provide you with a greater level of comfort the next time something unexpected, like a global pandemic, befalls you.
Additionally, if you haven’t done so already, now may be the time to request a line of credit from your bank. Don’t spend it now, but keep is as an emergency fund in the event your business begins to struggle.
Ultimately, if you’re seeing that your expenses are outrunning your revenue, then you’ll need to start cutting costs. Otherwise, keep in mind that you don’t, necessarily, have to react dramatically to a recession. In fact, you’re likely better served by trying to maintain a “business as usual” approach if possible.
5. Look Beyond Just Your Small Business
Should the worst-case scenario unfold, and you’re forced to shut your business down – or worse, close for good – keeping an open mind to new opportunities will help you remain resilient and determine how to move forward.
This sort of change is always difficult, but if you maintain an open mind, you can begin looking at things in a different way. Maybe you have a side gig that you can begin to capitalize on further, or it could be the perfect opportunity to push yourself out of your comfort zone and try a job that you’d never considered before. Regardless, you may learn new things about yourself or acquire a new skillset that can ultimately help you come out stronger on the other side.
Surviving the ‘Stress Test’ of a Recession
Whether you’re in the midst of a recession or not, having a solid grasp of your finances, maximizing your assets, and keeping your debts low are things that small business owners should focus on. What changes during a recession is that these things become more necessary and are, ultimately, critical to your business’s success. When things get tight and your business starts suffering due to a recession, these financial habits may mean the difference between bankruptcy and survival.
If this pandemic has taught us anything, it’s how quickly something unexpected can take over our lives and how important it is to have your business ready for whatever may come. Here at Resolute, we don’t just want your business to survive, we want it to thrive. If you’d like help establishing your business on firm, recession-proof financial ground, don’t hesitate to reach out so we can begin a conversation today.