As any business owner knows, there are risks inherent in running a business. This includes operational risk, which stems from business processes; reputational risk, which can occur from the action of delinquent employees or even actions of the company itself damaging its reputation; and strategic risks, which happen from mergers, acquisitions, or even industry changes.

Many of these risks can be foreseen, but not all events that affect your business are predictable. Changes in interest rates, world-wide emergencies like the COVID-19 pandemic, inflation — these can all put pressure on your business by themselves, and taken altogether, they can lead to an economic recession. We can never be sure when these economic downturns might occur, but what we can be sure of is to prepare our business to be recession-proof.

In this post, we look at strategies small business owners can implement today to mitigate the effects of future recessions. These strategies might look a little different depending on your business structure — whether you’re a sole trader, partnership, limited liability partnership (LLP), or limited liability company (LLC). But if you follow them, you’ll be better equipped to sustain your business through a recession.

Evaluate your employees

Before an impending recession hits, it’s important to reevaluate your business and halt any new hires for the time being. Have you hired individuals who are crucial to your business, or did you hire during an unexpected economic growth because you couldn’t keep up with the demand? You don’t want to make any rash decisions, but if you didn’t carefully consider your business structure, the day-to-day operations and the business model, you might want to do so now.

Instead of letting several of your employees go, consider keeping them at a reduced pay rate, employing them part-time, or employing them as freelancers. Cutting employees or reducing their employment status can be difficult decisions but better to do so now before you have an unnecessarily large workforce and have redundancies within your business.

Diversify your offerings

You know the saying, “Don’t put all your eggs in one basket?” This can be applied to your business. Successful companies know not to rely solely on one product or service to keep their business afloat. That’s why it’s important to diversify your offerings: it will give you various revenue streams and you’ll be able to weather the tough times during a recession.

For example, if you own a stationery company, there could be reduced demand for one of your products, like agendas, but there may not be a reduction in all your products like notepads and calligraphy pens. This is a great way to look for a gap in the market and seek out a new business opportunity. On top of that, diversifying will allow you to adapt to changes in the market and to consumer needs.

Minimise your debt

It’s common for businesses to go into debt to finance their operations, whether it’s using lines of credit or charging expenses to a business credit card. Plus, debt can allow business owners to scale without using any cash flow or diluting ownership.

However, debt also has a big downside: if it’s not managed properly, things can get out of hand quickly. In the worst-case scenario a business owner has to file for bankruptcy. This move could exempt you from having to repay business debt depending on your business structure — for example, if your company is an LLC — but can severely constrain your future business prospects.

In an economic downturn, debt can become even more of a strain on your operations. If you currently have business debt, create an aggressive plan for paying it off as soon as possible, especially before a recession hits. Avoid taking on more debt unless it’s absolutely necessary.

Take stock of how much debt you have, your bank’s credit terms, payment terms, interest rates, where your cash flow is coming from, and how much income you’re generating. Once you have a clear view of your income and expenses, and everything is neatly configured into a business budget, calculate how much the business is able to put towards the debt each month.

Cut unnecessary expenses

When reviewing your business budget, see where you can cut unnecessary expenses. Consider alternatives that help you conserve resources. This might mean ceasing business travel in favour of leveraging today’s technology to host virtual meetings with employees and business partners alike. Similarly, rethink how much you spend on everything from your office supplies to your office location.

While marketing is obviously important to attract new potential customers, look at ways you can find efficiencies in your marketing budget. Perhaps you need to reduce spending on social media ads, but you can put in more effort towards creating organic content like articles, newsletters, and social media posts.

Finally, if you are a product-based business, a good way to cut expenses is to find cheaper suppliers for raw materials — just make sure that you maintain the quality of your product so you retain loyal customers. You don’t want to jeopardize the integrity of your business or the standard of your product just to maintain profit margins.

Remember that these tough times are temporary, and you might even adopt some efficient cost-saving strategies for your business in the long run.

Protect your cash flow

One of the best things you can do for your business, whether it’s during an economic boom or downturn, is to have a thorough grasp on your financial numbers and projections, which includes monitoring your cash flow (the money coming in and going out of your business).

Cash flow is extremely important for small businesses because it covers short-term debt, gives them more negotiating power, allows them to seize new business opportunities, provides access to capital when needed, and helps them ride out an economic shock, making it easier for them to get back on their feet when things return to normal again.

Before a recession comes swooping in, there are some steps you can take to ensure positive cash flow. You need a bird’s eye view of what’s happening with your cash flow, so prepare cash flow statements and conduct regular cash flow analyses. Tackle late payments by ensuring it’s easy for customers to pay you, and conduct cash flow forecasting to get a better idea of what your business’ future finances will look like.

On top of that, you can also build up a cash flow reserve in case of emergency, just like you would build up an emergency fund for your personal finances.

Preparation is key

Owning a business is no easy feat, especially during a recession. But before you despair, take action so that you can face things head-on by evaluating your business as a whole to see if your employees are giving you the most bang for your buck, diversifying your offerings, tackling your debt, cutting unnecessary expenses, and monitoring your cash flow.

Recession-proof your business with an accountant

Don’t wait until times are tough to seek help. Start creating a detailed plan to ensure you’re recession-proofing your business and start by requesting a consultation right here from one of our London Accountants. Knowing where you can fine-tune your business finances to ensure you can weather any storm is crucial to set you up for success.