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How to Recession-proof your Small Business

  • Writer: Anthony Lupoli, CPA/PFS, CFP®, MAcc
    Anthony Lupoli, CPA/PFS, CFP®, MAcc
  • Aug 30, 2023
  • 4 min read
The entrepreneur's field guide to weathering downturns

recession

In an ideal world, businesses would operate in a stable and predictable environment where the economy is always robust, and market conditions are forever favorable. However, in reality, the business landscape is subject to fluctuations, including economic downturns and recessions. For small business owners, a recession can be particularly devastating due to limited resources and lesser room for financial errors. To survive and even thrive during these challenging times, it is crucial to take proactive steps to "recession-proof" your business. In this post we'll explore some best practices to help fortify your small business against economic downturns.


1. Keep up-to-date financial statements


This is the most important step in protecting yourself and your small business from an economic malaise. Without clean and up-to-date records, you won't have the information necessary to make strategic decisions based on the changing economic environment. For example, how will a restaurant know what to do without a clean balance sheet that displays verifiable cash on hand and inventory? Without it, the restaurant owner won't know how much runway they have to maintain operations in the case of slowing demand. It's well worth it for any business owner to get themselves QuickBooks, or another accounting software, and have a CPA review their financials so that they have the information necessary to take action.


2. Meet with an Attorney and CPA


Make sure your tax and legal structure for your business is buttoned-up. Are your operating agreements updated? Are your assets deeded to whom they're supposed to be? Additionally, taxes are the biggest expenses you'll incur as a small business owner. Whether you have cash on hand or not, you're going to incur a tax bill, either throughout the year with payroll, or at the end of the year with self-employment tax. Now would be a great time to meet with a CPA for a tax projection so you can set aside the funds necessary to meet your tax obligations. It would also be prudent to discuss, with your CPA, strategies to mitigate your tax burden so you can build your savings in the event of a downturn.


3. Build a Strong Financial Cushion


Another important step in safeguarding your business against a recession is establishing an emergency fund. Aim for at least three to six months' worth of operating expenses. This will give you some breathing room to adapt your strategies and keep the doors open when revenue slows down. This applies to not only your operating cash for your business, but also your personal cash as well, especially if you have service-based business without any tangible assets.


4. Pay down (better yet, pay off) debt


Don't want to go all Dave Ramsey here, but getting out of debt creates a feeling of freedom. More importantly, you eliminate potential risks from creditors should you be unable to pay your obligations during a downturn. Now I am not talking about debt that helps grow your business, for example, taking out a credit line that helps you open a second location, hire more staff, or purchase additional equipment that increases efficiency. I am talking about consumer debt such as high-interest credit cards and auto loans. These will do nothing but act as a wet blanket over your cash flow and puts you at greater risk of default during worsening economic conditions.


5. Keep your Powder Dry


Economic downturns have been known to create opportunities for savvy investors to take advantage of distressed assets, and later cash in when the economy recovers. As a small business owner, you can apply this same mindset within your own industry. If you're fortunate enough to have strong financials during a time like this, you might want to explore opportunities to expand your market share in your local community. For example, you have a business owner who might be struggling with debt, they might be relieved just to have someone assume their obligations, and in turn, you take over their operations for below market-value.


6. Strengthen Customer Relationships


It’s easier and less expensive to retain current customers than to acquire new ones. During uncertain times, focus on providing exceptional service and value to your existing customer base. Consider upselling or cross-selling additional products or services to your existing customers. Offering bundled packages or discounts for long-term contracts can also solidify these relationships.


7. Evaluate and Adjust Your Business Model


Technological tools can help you streamline operations and reduce costs. This could mean implementing an accounting software to manage finances, or adopting a remote work model to cut down on office expenses. If the market demand for your current products or services diminishes, be prepared to pivot. Altering your business model to meet the needs of the current environment can make all the difference.


8. Keep an Agile Team


Ensure that your team members are cross-trained in various roles. This not only adds flexibility to your operations but also prepares you for any unforeseen staff reductions. Maintain an open line of communication with your team. Keeping them in the loop about the state of the business can improve morale and help generate ideas for improvement.


While no business is completely recession-proof, taking proactive steps can significantly mitigate the risks and impact of an economic downturn. By building a strong financial cushion, closely monitoring cash flow, nurturing customer relationships, adjusting your business model, and maintaining an agile team, you'll be better positioned to weather the storm.


Remember, a recession doesn’t last forever, but the lessons you learn and the changes you implement can lead to long-lasting stability and success for your small business.



IMPORTANT DISCLOSURES AVL CPA Firm, LLC. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

 
 
 

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