How to Brace Your Small Business for a Financial Downturn
Every year since 2022, economists and strategists have been raising alarms over a potential recession. However, so far, so fortunate, as the U.S. has managed to avoid any sort of sustained contraction.
Will we be so lucky in 2025?
The strength of the U.S. economy is in question because of a constantly shifting trade environment. The current administration has an “on again, off again” approach to taxes on imported goods, and the latest “on again” has covered virtually every country and territory on the planet.
The good news? Recession is not the consensus call — only a handful of economists and market professionals think we’ll hit a full-blown contraction. JPMorgan Research is among those bears, with Chief Global Economist Bruce Kasman saying in April that “even with the latest step-back from the draconian Liberation Day measures, what remains is still enough to push the U.S. and China — and thus likely the global economy — into a recession this year.”
The bad news? While most experts believe we’ll miss a recession, they think it’ll only be a near-miss. BofA Global Research believes “elevated tariffs and policy uncertainty should lead to significant stagflation, with a 35% probability of a recession.” Stifel forecasts a “slowdown but not a recession.” Goldman Sachs says recession isn’t their base case, but the risk of one is elevated.
So, while a technical recession — which ultimately would be determined by the National Bureau of Economic Research (NBER) — might not come to pass, it’s clear that many economists view continued difficult times ahead.
If your small business hasn’t prepared itself for the possibility of a financial downturn, you should give it some serious thought. We can help you start that thought process with a few recommendations.
5 Ways Small Businesses Can Brace for a Financial Downturn
1. Tighten Up Inventory
In a recession, inventory is not your friend. The less people are able to spend, the longer some of your inventory might remain on the shelf. And the longer inventory remains on the shelf, the more likely it is to expire, become damaged or even be stolen.
Naturally, you also don’t want to risk constantly running out of product, so be strategic about where you tighten up on inventory. Low-margin, low-volume goods are an ideal place to start; but make sure you still have your most profitable goods in stock.
Clamp Down on Invoices/Receivables
You’ll never help your cash flow by being undisciplined about collecting invoices in a timely manner. But you might never truly feel that pinch until you’re in the midst of a recession.
Begin by sending reminders to any customers who have slipped past the 30-day mark (or the typical time you allow for an invoice to be paid). Then work on prevention by evaluating your invoicing policies. You might consider shortening the amount of time in which you expect to be paid. You could add incentives for customers who pay on time, or use a bill pay service to allow customers to auto-pay. Or, if you prefer to go the route of negative reinforcement, tack on penalties for late payments.
Identify Key Personnel
In an absolute worst-case scenario, you might be forced to shrink your workforce, which means doing more with less. In that scenario, you’ll need to lean on your best employees.
But being strategic with personnel before a recession might just prevent you from having to reduce headcount.
Good leaders are worth their weight in gold when economic times are difficult, as they help motivate (by example and by guidance). That’s likelier to keep employees engaged and motivated, which could result in better productivity when you need it the most.
Establish a Line of Credit
The worst time to try to apply for additional funding is, ironically, when you need it most. And conversely, the best time to apply for it is when you don’t need it at all.
So, rather than waiting until your small business is low on funds to apply for a loan, consider taking the time now to apply for a line of credit. A line of credit allows you to tap precious funds when you need them without paying any interest until you’ve actually borrowed against the line of credit. That’s precious peace of mind heading into a potential financial downturn.
Get Specific
In a recession, spending on discretionary items (things you want) tends to taper off while spending on staples (things you need) remains resilient.
Of course, not every small business has the luxury of dealing in staples — so where possible, you’ll want to consider doubling down on your goods or services that are most critical to your customers. If you’re one of several hardware stores in the area, but you know you already do a robust business in plumbing repair supplies, make it evident to customers that you’re the place they have to go when they’ve got a leaky faucet. If your restaurant has a wide-ranging menu but your Greek dishes bring in 80% of revenues, consider streamlining your offerings and leaning hard into the moussaka.
Set Up Your Recession Preparedness Plan
The stakes are quite high: If you don’t make it through a financial downturn, you no longer have your small business. So don’t leave your economic preparedness to chance, and don’t make your plan alone.
McManamon & Co. accounting, tax, fraud, forensic and consulting firm that serves small and midsize businesses. And our accounting team can take a comprehensive look at your books, as well as guide you in shoring up your finances ahead of a potential recession.
Learn more about how McManamon can help your small business. Call us at 440.892.8900 or contact us online today.
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