Prepare Your Small Business for an Economic Downturn
Thousands of independent variables affect our mixed economy, and downturns are inevitable. However, there are steps every small business can take to prepare for a decrease in consumer spending.
- Know the demands of your industry. Learn what’s happened to other businesses in your industry in previous downturns and how they survived. Are there key areas of development you could pursue now to help your business survive? What types of economic shifts affect your business? When in a slow-down are businesses like yours affected? Create a timeline from the first signs of even the smallest recession so you know when it will affect your sales.
- Have an emergency plan. This starts with knowing what you would consider an emergency for your business. Maybe it’s losing one of your top clients, experiencing a major down-turn in online-sales, running low on available cash, experiencing a major decline in sales, having to close one of your physical locations, or having overhead costs increase by a certain percentage. Have a multi-stage game-plan in place for when each level of emergency happens, so you can work to prevent the next worse from happening. Draw up new marketing and sales strategies to try. Know where you can afford to cut costs in the short- and long-term. Understand just how lean you can run your business before having to close.
- Prepare for budget cuts. Understanding where and when you could make budget cuts and temporarily decrease spending often means having a better chance of surviving an economic downturn. When considering letting employees go, cutting benefits, reducing marketing, or keeping less stock on-hand, think carefully about your priorities as a business. Your budget cuts should be sustainable—meaning they aren’t so severe that customer service suffers, and you lose income unnecessarily.
- Diversify client/customer base. Broaden the profile of your ideal customer. Work to include different demographics in your target market. Having clients with an array of incomes, lifestyles, spending habits, etc. means that if one group curbs their spending on your service/products, there will be others who will still visit your store and help you pay your bills. Consider partnering with other local businesses on events that could expose your company to new potential customers.
- Have alternate sources of income. In addition to selling directly to customers, consider selling advertising space on your website or use affiliate links for additional income. Have a prominent outdoor space in a busy area? Consider selling advertising space there, too. Host community events in your space for a fee, or for free but with the intent to sell products during times of increased foot traffic. As a business owner and expert in your product/service/field, consider speaking at events or doing consulting work. The more varied and independent sources of income you have, the stronger your business will be regardless of the economy’s movements.
- Have a cash reserve. As with personal finances, it’s best to have three to six months’ worth of operating cash in reserve in an easily accessible account. Even better, have a whole year saved up. This “rainy day” fund can be a shock absorber while you implement your budget cuts, emergency operating plan, and other sources of income. Also consider increasing your line of credit at your business’s credit union in case you need to use that as a short-term solution.