Accounting & Finance

5 Steps to Help Recession Proof a Small Business

Written by Andrej Kovačević

Here in Australia, we’ve been seeing some troubling economic signals in recent months. The real estate market is now in an extended slump. The Australian dollar is at 3-year lows. The signs of recession are everywhere. For small business owners in the region, that means there is a good chance there will be tough times ahead if they’re not already here.

To make sure that you’re ready to weather the storm, it’s time for small business owners to take steps to recession-proof their businesses. Doing so requires a mix of strategic planning, some shifts in operations, and plenty of focus on personal growth – but it’s not as hard as some might imagine. To help, here are five ways to prepare a small business to ride out a recession and emerge successfully on the other side.

1. Prioritise Cash Flow

In an economic downturn, businesses need one thing above all else to survive: cash. In anticipation of worsening conditions, now is the time for small businesses to start getting their cash flow in order. First, they should create new cash flow forecasts to make sure they’re working with the most up-to-date information. Then, they should make sure that their invoicing and accounts receivable operations are working efficiently. Once those foundational aspects are squared away, turn to the other side of the ledger and pare down fixed expenses to the greatest possible degree.

2. Minimise Inventory

One of the biggest dangers to a small business when a recession hits is that they’ll be caught holding on to excessive inventory they won’t be able to sell. Once that happens, the only option is to sell their products at a steep discount or continue to pay for housing the overage until conditions improve. To avoid falling victim to such an outcome, small businesses should start exploring just-in-time inventory management techniques wherever appropriate. Doing so will reduce the likelihood of them getting caught flat-footed when sales start to slow down and allow for a quick response when conditions change to reduce losses. Alternately, when JIT techniques won’t work, businesses should explore dropshipping to run a leaner operation.

3. Create an Emergency Fund

Any small business owner can tell you that running their company’s finances is not all that different from running their personal finances. For that reason, it’s a good idea to borrow a personal finance tactic as a part of a small business recession strategy: the emergency fund. While the business is still seeing steady sales, it’s a good idea to create an emergency fund that could see the business through hard times. At a minimum, the fund should be enough to cover at least one month’s worth of payroll expenses and any other essential business outlays that exist. That way, the business will be able to continue operating even if it suffers a whole month of negative cash flow – which is all too common in a recession. If the business can afford to do so, expanding the emergency fund to cover additional months of operation is desirable, just as long as it doesn’t cause a cash crunch in the present.

4. Revisit and Bolster Marketing Strategy

Even when recessions take hold, the broader economy doesn’t stop. That means that in almost every industry, there will still be opportunities for sales. The key to surviving a recession is to ensure you’re the business that makes those all-important sales. To do that, it’s vital for small businesses to secure a bigger slice of their target market in advance of a downturn, and the best way to do that is to sharpen their marketing message and tactics. In fact, it’s advisable to take some of the savings achieved through the inventory management changes in the previous step and re-invest them straight into the marketing budget. The extra effort will pay off in healthier sales that will withstand any recession.

5. Embrace Personal Stability and Development

Small businesses, unlike their larger counterparts, face their own specific challenges in a recession. The first, and most serious among those is that it becomes very difficult to secure working capital when lenders start becoming nervous about the state of the economy. The only way around that is for small business owners to make themselves a safer bet for those lenders in advance of the downturn. First, it’s vital for them to make sure their personal credit is in order, as they’ll be the primary guarantor for any loan to the business. Then, they should take steps to build up their professional bona fides. Earning industry certifications is a good place to start, as are postgraduate courses online in business administration and related fields of study. Lenders will consider those credentials when making loan determinations since they’re an indicator that the borrower is a good risk.

Ready to Thrive

Clearly, those Australian small businesses who prepare for tough times before they set in will find themselves in good stead to thrive. By cutting down on inventory overhead, maintaining stable cash flow and access to capital, and pursuing a greater share of their target market, getting through an economic slowdown becomes far easier. Also, the business will benefit from the changes long after economic conditions improve, becoming more agile and competitive in the process. Then they’ll emerge from any recession in a position to expand, rather than merely surviving – and that could help them turn a weakness into an advantage the competition won’t be able to match.

“The opinions expressed by BizWitty Contributors are their own, not those of BizCover and should not be relied upon in place of appropriate professional advice. Please read our full disclaimer."

About the author

Andrej Kovačević

Andrej Kovačević is the head of production at Melbourne based, independent digital agency, Amebae Online. Andrej's favourite topics to read and write about include marketing and the ever-changing landscape of Fintech.

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