There’s a lot of discussion right now about a recession, and many small business owners are worried about their expected profitability. Although recessions do put added pressure on businesses, it’s also outside your control, and focusing on this economic uncertainty will only make you feel helpless and cause unneeded stress.
To keep your operations financially sustainable and your business viable, focus on what you can do to preserve your margins and strengthen your business. Instead of fearing a recession, channel your uncertainty into optimizing your pricing strategy and pursuing other financing sources.
Business failure rates in a recession
According to the Small Business Administration (SBA), between 1999 and 2019, there was no statistical change in the failure rate for businesses five years or younger. While the pandemic did have a major impact on the economy, the data shows that “a negative economy has little impact on a given business’ survival.” The failure rate for businesses in operation for one year was about 20 percent, and around 50 percent for companies in operation for five years.
Focus on delivering the best value, not the lowest price
Lost customers, profitability or slowing cash flow are not signs of failure, but rather signs of underlying issues to be addressed. In response to their customer’s concerns about recession-driven price hikes, one of the first things many small business owners do is to either lower their prices or absorb the cost increases from their suppliers and vendors. But this knee-jerk response isn’t strategic for small businesses. Only high-volume, highly efficient enterprises — rarely small businesses — can generate reasonable profit on thin margins. As a small business leader, avoid reducing prices and devaluing your business.
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Instead, focus your pricing strategy on delivering the best value for your customers’ money. If you haven’t done so recently, survey your customers about your products or services. Don’t make assumptions about why they do business with you. Then, use this feedback to improve your products and services.
Emphasize the valuable services you provide, such as a 90-day guarantee when your competitors only offer a 30-day guarantee. Highlighting this embedded value will show customers that if they have to pay more for your services, they are paying more for more. See if there are any products or services you can bundle (at little cost to you) that would boost their value to customers. For example, you could include a free consultation or follow-up. Consider partnering with other businesses that serve the same market to bundle services or provide valuable add-ons.
Another strategy you can try is offering discounts for frequent customers or bulk orders. While strengthening customer satisfaction and loyalty, you’ll also protect your margins by making bigger sales with less effort.
Explore alternative financing options
According to JPMorgan Chase, the typical small business has a median of 27 days of cash reserve and “holds an average daily cash balance of $12,100.” This does vary across industries, with more capital-intensive industries holding more cash reserve, and more service-oriented businesses holding less. But the key takeaway is that this average reserve covers less than a month.
When business financial indicators such as gross margins, profit margins and cash on hand start to degrade, banks — particularly large national banks — often tighten the criteria for small businesses to get commercial bank loans and credit lines. Even though interest rates may be rising, these banks’ focus is on loss prevention. So it’s best practice to request any loans or increases in credit lines while your financial statements reflect the same financial health. However, if your interest rate shoots up or your terms become near untenable or you simply cannot get a bank loan, then tap into other financing options.
Again, consider partnering with another business that serves your customer base. Many businesses cut their marketing budget at a time when they should really be increased, or at least maintained. By co-marketing bundled services, you could potentially reduce your operating costs by half — and reduce the need for outside cash. To further conserve cash, consider negotiating and bartering with your existing vendors. Does your business provide IT services that your graphic designer needs? Maybe you can trade services. Make sure both you and your new business partner use your typical contract write-ups, respectively, and that the contract reflects your usual fees.
In regard to actual financing, if you have large or corporate customers with strong credit profiles who are paying you more slowly, consider contacting an accounts receivable financing firm. They may even offer lower interest rates than banks, as they base their rates on the creditworthiness of your customers rather than your company. If you operate a consumer-based business with high credit card usage, consider using a fintech firm to obtain a credit line against the monthly credit card flow — making sure to do your research and weigh all your options.
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If you have a product that people want, consider starting a crowdfunding campaign to build or distribute your sought-after product. This option is especially viable if you have a solid email list, or affordable access to PR or social media gurus. Finally, do whatever you can to get your payment terms extended with your vendors and suppliers. As a short-term financing option, moving from 10 days to 30 days for payment (or from 30 days to 45 or even 60 days) will hugely benefit your cash flow.
More ways to protect your business investments
To protect your business from a possible recession, make sure all your insurance coverage is up-to-date, including the insurance you have for your actual business and any related assets owned by you or the business. You don’t want to have to pay out a large sum when your business is stressed. If you don’t already have it, consider purchasing key person insurance, which helps your business weather a key employee’s absence due to a health crisis, natural disasters or other emergency.
Focus on your bottom line — this means paying attention to your margins. Check your financial statements on a monthly basis and immediately question any reductions or increases. Review all your costs and see where you can reduce them so that you have more flexibility with what you pass on to your customers.
The key to thriving in any economic uncertainty is solid strategy and operations. Learn what that means for your business so you can emerge healthier, stronger and more profitable.
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