Small businesses are vital to the U.S. economy by keeping money in local communities. In 2021, the United States had 32.5 million small businesses that employed almost 47% of the private workforce and generated over 40% of the economic activity in the U.S.
As the world’s economy still recovers from the COVID-19 pandemic shutdowns, supply chain issues, labor shortages, and higher consumer demands, inflation rates grew to 9.1% in June 2022. Soaring prices for everything from gasoline and groceries to electronics are taking a toll not just on consumers. Small businesses across the nation are also dealing with the economic impact.
Small Business Recession Fears
A recent Goldman Sachs survey showed that 93% of small business owners are worried that the U.S. will enter a recession in the next six months. But, not everything is doom and gloom in the survey: 65% of business owners said they remained optimistic about prospects for their businesses, and 65% of respondents said they were currently hiring full or part-time employees.
Is A Recession Coming?
There are many differing opinions on whether the U.S. economy is currently in a recession. Some economists say that the U.S. economy will go into a recession in the second part of the year and into 2023 based on historical factors, such as negative GDP numbers for two quarters in a row, high inflation rates and Federal Reserve rate hikes. Others say the job market and consumer confidence are strong, and we are not in a recession.
The U.S. Chamber of Commerce can’t say with certainty if the nation is facing a recession because other economic factors, such as job growth, income growth, consumer spending and manufacturing output, are booming. However, they recommend that small business owners monitor economic activity and prepare for economic downturns.
How to Prepare Your Small Business for a Recession
Small businesses could not prepare for the upheaval caused by the COVID-19 shutdowns. They had to change business models and operations nearly overnight. Some companies didn’t survive the turmoil, but others adapted and thrived. The current recession dialog has been going on since the beginning of the year, giving small business owners time to prepare to weather an economic downturn.
Tips to Recession Proof a Small Business
Small businesses can prepare their businesses now for a potential recession by saving, adapting and looking ahead to the future. Some tips to recession-proof your small business include:
Pay off your business debts: Make aggressive plans to pay off your business debts, such as loans and credit card debts, as soon as possible.
Have an emergency savings fund: Set aside money for an emergency savings fund with a three to six months “cushion” to cover business expenses during a recession or other adverse events. The fund will help with the costs of loss of income, employee loss, a lawsuit or protecting a large inventory.
Cut unnecessary spending: Track your expenses to determine where to cut spending, such as unused services or subscriptions, while maintaining your business’s essentials. Be ahead of the recession by devoting savings to your investments and contributing to your emergency fund.
Have a financial plan: Review your current finances to identify your needs and then create a financial plan including a budget, savings, investments and earning goals. A healthy financial plan can help prevent losses and promote business growth, even during a recession.
Be adaptable: Be aware of the current economic climate, listen to your customers and employees, and conduct the necessary research. Be prepared to pivot or adapt your strategies and offerings based on the changes you see.
Be transparent with your staff and customers: Economic downturns are stressful for business owners, employees and customers. Keep your team informed about your business and the why behind new products, business model pivots, etc. Openly communicate with your customers about when you are closed, expected to reopen and additional offerings you can give.
Keep investing in the business: Invest in marketing and advertising and seek growth opportunities where possible. Put your emergency funds where they will make the most impact. For example, investigate products and services that are underserved in the market and see how you can meet that need.
Understand your stock market assets: Know what is going on in your investment portfolio. You might need to sell some stocks and buy more of others. Rebalancing your investment portfolio safeguards you from being overly exposed to undesirable risks.
Check your insurance: Look at your business insurance coverage to make sure you have adequate coverage. With money tight during a recession, you want to make sure you are covered for unforeseen issues. One type of coverage is business interruption coverage, which protects businesses from the loss of income resulting from a disaster.
A recession is an inevitable phenomenon in any economy. Ultimately, the best thing to do during a recession is not to panic and to focus on long-term financial goals. If you make the right decisions for your organization now, a recession might be a lucrative opportunity for your business.