Learn from finance experts on some of the best ways to prepare for a recession. Even if your business is in a good place, these tips can help you feel ready for any type of economic downturn.
Is it time to prepare for a recession? Are we already in one? These questions have been circulating for months leading to even more questions for individuals and independent business owners.
As of publication, the U.S. economy has been shrinking for two straight quarters, or half of the year, and inflation is at an all-time high. While this usually points to a recession, the job market is actually growing, which is the opposite of what happens in a typical recession.
With that said, economists predict that an economic downturn could still come later this year or next year.
If or when a recession hits, it’s a good idea for businesses to cut costs and save money. Consumers and businesses alike will be spending less, so it’s important for your independent businesses to maximize profit wherever it can.
To prepare your business for a recession, we spoke with Dominique Broadway, personal finances expert and founder of Finances Demystified, as well as Geily Romero, HoneyBook Pro and owner of Cutting Edge Financial Solutions.
- The good news
- Examine your expenses
- Consider your staff
- Create a savings strategy
- Line up financing options
- Understand what’s working and what isn’t
- Prioritize positive cash flow
- Pivot some products or services
- Lean on your business relationships
- Feel confident in your preparedness
First, some good news
The hint of a recession can make many business owners panic, but we’re facing plenty of good news to help you feel better prepared about the current economic situation.
For starters, recessions are usually a time when more people are starting their own businesses. Just like what happened during the pandemic, a recession will likely cause former employees to make the jump into ownership for a variety of reasons. If you’re already an independent business owner, you’re positioned particularly well to survive a recession–you just have to make sure to start preparing now.
At HoneyBook, we surveyed independent business owners and found that 57% had more confidence in their business success in the past six months. Furthermore, 42% of respondents said that their business has actually been positively impacted by the economy.
If you’re a service-based business, some evidence points to you coming out on top in regard to inflation. While consumers are cutting back spending on goods and products, they’ve actually been spending more on services
As the news continues to change, we encourage you to stay on top of these economic trends and continue to evaluate how inflation is impacting your business. In the meantime, here are some actionable steps you can take to feel more prepared for an economic downturn.
1. Examine your expenses
If you haven’t been paying close attention to tracking your expenses, now’s the time to start. Even if you don’t have an accountant or accounting software, you can start with your bank accounts. It’s never too late to get set up with an accounting system, but it’s more important that you’re assessing what you have.
It’ll be hard to make financial decisions if you don’t have the financial data to determine where to cut from. – Dominique Broadway
Review everything you’re currently spending money on and consider what’s necessary and what isn’t. To do this, you can align each expense with a return on investment (ROI). Which expenses are actually helping to generate profit?
As a goal, you want to make sure your business is operating right now with the least amount of overhead. That means you can start canceling tools or subscriptions you aren’t using, cutting supplies that you don’t use often, and even considering your office space.
When we surveyed independent businesses, we found that 39% had already reduced business expenses this year to cover rising costs.
If you’re paying for multiple subscriptions to manage contracts, invoicing, payments, and more, consider an all-in-one business management system. A platform like HoneyBook allows you to manage multiple business processes in one place, which can help you cut other software subscriptions that add up quickly.
We don’t even realize how many things we’re spending on–it happens in personal and in business. – Geily Romero
If you’re not sure about whether you can cut something or turn it off, you can always explore ways to make it more affordable in the short term. Consider downgrading your software instead of canceling it. If you work with a business coach who’s become too pricey for your budget, see if they’ll consider working with you at a lower-tier package.
2. Consider your staff
One of the most difficult things about preparing for a recession is considering your staff. Unfortunately, you can’t always keep people on if you’re eliminating some services or temporarily putting some efforts on hold to keep your overhead low.
Consider your team right now and their current responsibilities. Is their work directly impacting revenue? Understanding the numbers behind the work is important so you can make these decisions based on your business outcomes, not your emotions. When you’re already making the hard choice of offboarding team members, you want to make sure it’s absolutely necessary.
If you determine you need to minimize your team for the time being, you can always consider transitioning employees to contractors or shifting full-time employees to part-time. With these decisions, keep in mind what’s best for your employees as well. They may have an easier time finding a new position instead of working fewer hours.
Throughout these decisions, be sure to maintain honest communication with your employees. They should know why you’re making these changes as well as your hopes for the future. At one point will you aim to bring the team back? If you’re limiting their hours, when can they expect to be full-time again? You might not have all the answers, but you can make the situation easier on everyone by staying transparent.
Through it all, you don’t have to feel like a failure because of any big changes. Remember that these are short-term solutions to help carry you forward so you can keep your business running for your clients and employees in the long run.
3. Create a savings strategy
When you’re preparing for an economic downturn, you want to make sure you have a cash reserve ready to keep you afloat (should you need it). If you haven’t been saving before, you can get started immediately by putting a system in place.
To start, you don’t need to focus on the amount. Instead, choose a percentage you want to start putting aside from each sale or from your total income each month. Next, automate the process of saving that percentage so you don’t have to worry about doing it yourself.
Once you’re saving any amount, you can think about scaling up as needed as you determine what’s doable for you and your business.
To make the most out of your savings, consider high-yield savings accounts for your business or investing in options made for inflation like treasury bonds. If you’re investing your money, just make sure you aren’t putting it anywhere that will fluctuate too much or be locked away for a long period of time. For example, a 401(k) is a great place to invest your money for retirement, but it has a lot of short-term volatility, and you can’t access the money there without steep tax penalties.
You can also focus on increasing your income any way you can so you can save more, such as by using flash sales and deals. Essentially, you want to focus as much on maximizing your financials for the next year or two, versus your long-term strategy for business growth.
4. Line up financing options
Along with your savings, you should start to look for financing options now. Even if you don’t need it yet, having it available can give you another emergency cushion to rely on.
Consider which business loans you can qualify for as well as what you can afford for your business. You want to find the sweet spot of financing that can give you a boost in the short term but won’t pile on debt in the long term.
Currently, some eligible HoneyBook members can access HoneyBook Capital business loans that are based on current revenue, offering more confidence that you’ll be able to repay the loan quickly.
You can also explore asset-backed lines of credit, which use your business assets as collateral. These types of loans can be easier to secure and more flexible, so they’re a good option for obtaining financing quickly and leveraging the assets you already have.
5. Understand what’s working and what isn’t
During this time, you need to have a solid understanding of how your business is performing. You might have a long-term strategy and plans for the future, but it’s time to shift your focus onto what’s working and what isn’t right now.
For example, if your ad campaigns are pulling in a lot of qualified leads, you know you should maintain your budget for them. Otherwise, it may be worthwhile to cut your advertising spend for the time being. Consider which other areas of your business are directly serving your revenue, such as event marketing, content, client retention, and more.
Take the time to evaluate your individual services as well. You may have services or packages that more clients purchase, which means the market is already telling you what to focus on. For now, you can shift your focus to marketing and selling those services as your main priority.
Shift to products or services that people need or can provide value when money gets tight. – Dominique Broadway
6. Prioritize positive cash flow
As you continue to make changes to prepare your business for a recession, keep an eye on your cash flow. Understanding how much money is coming in at any given time will help you forecast for the future so you can focus on staying in the green.
Evaluating and cutting your expenses will help with maintaining your cash flow, as well as software to track your leads and clients.
With a [clientflow] management tool like HoneyBook, you’re able to onboard clients in a way that helps you forecast based on leads and projects booked. – Geily Romero
If you can see your current project status and payments from a birds’ eye view, you can make better decisions about what to invest in now or how much you need to adjust your spending.
When you have a few months’ worth of payments scheduled, you should be able to determine if your business can continue operating at the same pace. If not, you may want to reduce expenses or focus on increasing your profits.
7. Pivot some products or services
Once you’re focused on maintaining or improving your well-performing services, you may need to put other services or products on hold.
Perhaps you’ve just introduced a new service that isn’t gaining traction. If you don’t have the bandwidth/budget to optimize it or continue marketing it, you might need to pivot or hold off on it for now.
Assess your products or services based on which ones are bringing in the most clients and revenue. For the ones that aren’t, consider the following:
- Can I discontinue these services for the time being and re-promote them once there’s more of a business case?
- Can I turn any of my lower-performing services into a passive income product?
- Would clients get more value from a smaller package offering?
- Do I need to remove the service or product from my offering altogether to specialize in what works?
With things that aren’t working, it might just not be the season for it or something you need to pivot right now. – Geily Romero
8. Lean on your business relationships
As you’re preparing your business for a recession, you can feel worried, stressed, and burnt out. That’s why one of the best things you can do is to rely on your community.
Communities like the Rising Tide are focused on business owners coming together to offer tips, referrals, emotional support, and more. While you’re facing uncertainty, other business leaders in your community may have more information that can help give you peace of mind.
By relying on your community, it can also help put everything into perspective. After all, many of us have faced multiple recessions that resulted in strong, resilient, and growing businesses.
Feel confident in your preparedness
If you’ve done everything you can to prepare for a recession, you’re in great standing. Don’t spend your energy stressing about all the possibilities. Instead, just keep moving forward where you can.
If it helps, you can even make a plan for your efforts after the recession that includes a list of services you want to try, audiences you want to test, and new business strategies. Adjusting your business for an economic downturn can often lead to some of the best opportunities for innovation and change.
Overall, make it a habit to continually review your numbers so you know exactly where your business stands. When you know your business inside and out, you can make the most informed decisions about how to lead it.
Thank you to our expert contributors in this article:
Geily Romero helps photographers, VA’s, Social Media Managers, & Designers manage and understand their finances so that together they can make strategic, financially-driven decisions. She’s a QuickBooks Pro Advisor who provides monthly and quarterly bookkeeping services by categorizing transactions, reconciling accounts, and providing end-of-month reports and breakdowns of key financial metrics.
Dominique Broadway is an award-winning Personal Finance Expert, Money Therapist, Entrepreneur, and Trailblazing Millennial dedicated to helping business owners demystify their finances and make their Dreams2reality!
Disclaimer: The advice featured in this blog post was sourced from our community members for sharing general information and knowledge. For specific financial and accounting information, please consult an authorized professional.