With the Bank of Canada rapidly increasing interest rates to combat decades-high inflation, financial experts are forecasting a likely recession. While this could mean a months-long economic downturn, it’s also an opportunity to take stock and shore up your small business operations.
To help you figure out how to recession-proof your business, this article will walk you through a number of steps you can take to keep your company strong no matter what the future holds.
7 Strategies to make your business recession-resistant
1. Create a cash flow forecast
While cash is always top-of-mind for business owners, cash flow is even more critical when a recession hits.
Creating a cash flow forecast is a great way to stay on top of your numbers, get the financial information you need to plan for the future, and identify lever points—areas where you can push or pull back in response to the economic situation.
To stay fully aware of your cash flow:
- Start by ensuring your bookkeeping is up to date
- Create a rolling cash flow forecast you can adjust monthly or quarterly
- Experiment with different cash flow scenarios to identify potential issues
It also helps to build good cash flow habits while things are going well—like ensuring customers pay on time with a system to keep accounts receivable under control.
2. Perform scenario planning
Rather than waiting until your business is in trouble, creating an action plan in advance will ensure you’re prepared in the event the worst happens.
That said, learning how to recession-proof your business should include experimenting with and analyzing the income and profit impacts of different scenarios, such as:
- An economic slowdown affecting your entire operation
- A reduction in your major revenue stream
- An increase in key material costs
Build a financial forecast for each scenario, then examine essential vs non-essential expenses to determine where a reduction in spending might help offset any revenue drops.
It’s also a good idea to create a list of tasks to perform should business slow down—such as investigating new product ideas, or bumping up marketing to your most loyal consumers.
3. Build strong client relationships
Not only will building solid client relationships during the good times help you hang onto more customers when times get tough, you’re more likely to benefit from positive reviews and referrals.
It’s almost always easier and less expensive to retain and get repeat business from existing customers—by offering excellent customer service and delivering on your promises, for example—than to acquire new clientele through lead generation, advertising, or other costly and time-consuming means.
So to help recession-proof your business in the short term, make it a point to focus on your best long-term clients rather than invest big money in attracting new ones.
4. Consider multiple revenue streams and new target markets
Pursuing multiple sales streams should top the list for how to recession-proof your business since adopting a variety of revenue channels across a wide range of price points will make it easier to maintain your income.
Here are some alternative revenue ideas to consider:
- One-to-one consulting
- Paid memberships for extended services or new product access
- Sponsored content or affiliate marketing
Diversification is especially effective for staying flexible during difficult times.
During the COVID-19 pandemic, for example, many high-end restaurants expanded into takeout and lower-cost offerings, allowing them to target a different market and customer base than they traditionally would have.
5. Explore different pricing options
As you consider serving new types of customers, you should also explore different options for pricing your product or service.
You might, for example:
- Sell simpler, less expensive versions of your services
- Reduce up-front customer costs by offering both subscriptions and one-time purchases
- Find ways to lower production costs and offer better pricing to customers reluctant to commit during uncertain economic times
Using different price ranges to make your products or services accessible to a wider audience can potentially bring in more business—even during a recession.
6. Look into financing options
Another key way to get ready for a business downturn is to investigate current business credit and financing options. With banks and other lenders already talking about preparing for a recession, it won’t be surprising if lending standards tighten.
One of the most useful financial tools when considering how to recession-proof your business is a line of credit. By securing a business line of credit, you not only gain access to a valuable cash cushion, you won’t typically incur fees or interest unless you actually find it necessary to use it.
7. Create an emergency reserve fund
If your small business is unable to secure a line of credit, the next best option is to create your own emergency cash reserve.
Ideally you should aim to cover 6 months of essential business costs, like:
- Payroll and inventory
- Rent and utilities
- Your commercial real estate mortgage
Contributing regularly to a rainy-day fund when you’re financially flush will afford you some reaction time to plan and adjust your operations should a recession impact your business.
Historically speaking, it’s not uncommon for business leaders to react to economic downturns (through cost-slashing, for example) rather than plan for one.
Today’s events notwithstanding, it’s always a good idea to prepare your business to deal with a potential recession or financial crisis—and establishing clear, up-to-date visibility into your financials is the best way to start.
Need more than just bookkeeping services? Enkel can help! Contact us today and find out how our team of accounting professionals can help you build cash flow forecasts and conduct scenario planning to effectively recession-proof your business