Small Business Strategies for Surviving a Recession

Small Business Strategies for Surviving a Recession

The prospect of a recession has many small business owners on edge. After operating under pandemic restrictions in an environment that influenced many consumers to change their shopping behaviors, there was the hope of a return to business-as-usual once mandates expired. Unfortunately, new headwinds present additional challenges threatening to raise costs and reduce profitability.

Economic Challenges Threatening Small Businesses

Inflation hit levels not seen in decades, with rising interest rates close behind. High gas prices have consumers feeling less financially secure. Supply chains are struggling due to the damage done during the pandemic and the uncertainty around the Chinese government's zero-COVID policy.

Additionally, the Russia-Ukraine war doesn't appear near a resolution, with severe human and economic costs more apparent daily. Closer to home, a divided legislative branch is almost sure to make significant policy moves more difficult this year. All of this affects small businesses worldwide.

Small Business Health Index (and Insights)

Dun & Bradstreet's most recent U.S. Small Business Health Index (SBHI) shows troubling signs about the state of surveyed companies. Dun & Bradstreet's U.S. Economic Health Tracker is a monthly, multi-dimensional review of the health of the economy. The SBHI follows a sampling of all active small businesses with fewer than 100 employees.

Data from February, the most recent month available, saw the overall index decline by 1 point month-over-month. The index has declined for six consecutive months. The main culprit in this deterioration is a higher trade credit delinquency rate across all tracked sectors.

Higher interest rates and inflation are taking a toll on businesses' ability to pay off debts on time. Budgeting is tricky as cash-flow predictions fail to align with the real world.

If the last few years have taught us anything, resilient small businesses can survive unprecedented challenges. While the data is discouraging, business owners can take steps to help reduce costs, increase sales, and prepare for better days ahead.

Small Business Strategies for a Recession

Negotiating favorable credit terms. Many companies' first instinct is to cut costs in challenging economic conditions. There are many ways to reduce outflow, but before making drastic moves, it can help to reach out to suppliers and vendors for relief. Negotiating lower prices or more favorable trade credit terms can result in actual savings. These partners are probably also uneasy about the economic outlook and may be more willing to cut a deal if it means retaining a customer.

Setting operating hours and staffing. Reducing operating hours, scaling back production, or laying off staff can save money in the short term, but you'll want to be strategic so that cuts aren't felt by customers who have come to rely on quality service from your business.

Companies should also think about ramping up work when the skies have cleared. For example, understaffing can become more severe once economic conditions improve, and a business can only take advantage of new opportunities once it fills its current positions.

This can be particularly challenging if you need to hire skilled laborers or professionals with specific educational backgrounds and experience. For these reasons, waiting to cut hours, production, or staff is wise.

Managing cash flow. A small business struggling to make ends may look for ways to increase the amount of cash coming in. The most straightforward way to do this is by raising prices.

As a company's costs increase, it must pass some of the increase to customers. However, much like letting go of staff, you should take a thoughtful approach to this move, including how you communicate change and its potential impact on business relationships.

Use caution when raising prices. Businesses raising prices need to keep an eye on market trends in this respect, so they don't become an outlier by charging too much for goods or services. However, your competition may decide to keep prices steady to undercut companies that opt to raise them.

Challenges can breed opportunity, and entrepreneurs should take the time to learn ways to increase sales. A contractor might expand their territory to create more potential customers overnight. Retailers or restaurants can expand to new products or foods and tap into additional markets.

Seeking Small Business financing. Seeking financing to improve your business's cash flow can provide critical support for companies that have experienced a reduction in revenue or an increase in expenses. Small business financing options include business lines of credit, small business loans, and business credit cards.

Banks and credit unions often investigate the company's financial history, its owner, or both. The importance of credit scores is one reason to keep business and personal financial accounts separate. They may require the borrower to have a strong commercial credit score and a history of timely payments.

Understanding all loan terms. As with any financial transaction, it's essential to understand the terms of your agreement. Interest rates and penalties can add up quickly if you can't pay off your debts, leaving the business in worse shape than when it began.

Closing Words for Small Business Owners

Nobody is certain how the economy will fare over the next year. The outlook could improve considerably, or persistent challenges might remain. What is certain is that a bit of preparation and proactive measures can go a long way to help protect small businesses from the worst effects of a possible recession.