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small business financial downturn

How to Brace Your Small Business for a Financial Downturn

2022 has been bubbling with talk over a word that no small business wants to hear: recession.

Of course, a lot of the reason there’s been so much discussion about a financial downturn is that there’s no consensus on when we might get one. 

Despite two consecutive quarters of negative economic growth (which admittedly includes a second quarter whose final reading hasn’t been taken yet), the organization that makes the call — the National Bureau of Economic Research (NBER) — hasn’t yet declared that the U.S. is in a recession.

Whether we enter a recession is being hotly debated. For example: Economists from the Federal National Mortgage Association (Fannie Mae) have said they expect the U.S. to fall into recession early next year. So does Steve Hanke, who told CNBC that the U.S. is likely to fall into recession over the next 12 months but believes it’s much likelier to happen in 2023 than 2022. However, Steen Jakobsen, chief investment officer at Saxo Bank, says we’re already in a recession in “real terms” … but he doesn’t believe the U.S. will fall into a recession in “nominal terms.” 

Regardless of any technical status, it’s clear that many economists view continued difficult times ahead. That’s why small businesses that haven’t yet prepared themselves for a financial downturn should give it some serious thought. And we can help start that thought process today with a few tips.

5 Ways Small Businesses Can Brace for a Financial Downturn

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. Now, 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, of course, 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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