Is my business model recession-proof?
Recessions are bound to occur, so long-term planning can help your company thrive, even when the economy faces a potential downturn. The main benefit of planning a recession-proof business is that it withstands downturns. Your company may not fare as well as normal, but it can remain well-positioned to continue operating and excel upon recovery.
Some recession-proof businesses provide goods or services that have strong demand regardless of the economy. For example, healthcare related services, grocery stores, landlords, and other essential services tend to see less of an impact on their bottom lines than businesses in the leisure, travel, or luxury goods industries. Strategic planning to provide something essential to your customers can help ensure your business survives those times when customers are cutting out their non-essential spending.
Alternatively, having a business model that allows you to cut operating costs without sacrificing too much revenue can also play a part in surviving an economic downturn.
How can my small business protect itself before a recession?
Not every business or every industry is well-equipped to handle a recession, and some will suffer more than others. Most small businesses suffer the impacts of a recession within the first six months of the downturn. The following tips can help you safeguard your business against recession:
Build cash flow
Many businesses fail because of cash flow problems when the economy is doing fine. When a small business struggles to generate a steady revenue that covers operating costs, it can lead to cash flow issues, especially in an economic downturn. Ensuring your business can generate the cash to operate and profit before a recession can give you the basis to survive a downturn. Businesses may want to consider expanding their offerings or customer base to help generate more revenue.
As a small business owner, cutting costs and expenses can be critical to increasing profitability. When you cut costs, you create more margin. That increased margin gives you more money in the bank, which can help you withstand a slowdown.
Make a plan for profits
Many business owners simply take profits and put them to personal use immediately. Instead, plan your profits to include paying yourself and investing in your business’s long-term success. Consider investing in marketing, getting new equipment, or making other upgrades at the business. You can also save some of your profits to get through slower times.
Keep employees happy
Employees are often a company’s most valuable assets. You have invested time, money, and energy into their development. When your workers are happy, they are more likely to be more productive or provide better service that builds strong customer relationships.
Build strong relationships with your customers
Clients that have good relationships with you and your team are more likely to come back regardless of economic conditions. Loyal clients will keep your business profitable and not abandon you during a recession.
Get financing when interest rates are low
Financing can help obtain new assets and leverage what you already have. As long as interest rates are high, borrowing may not be the best idea. Borrowing under favorable terms helps you keep costs down.
Purchase business insurance that protects against losses
Some business insurance policies will provide assistance in a recession. If your business suffers employee shortages, supply chain interruptions, or other unexpected consequences of a recession, insurance can help protect your company in some situations.
How can I identify when a recession will impact my business?
When a recession will impact your company can be hard to predict. Staying informed about the economy and your industry by following financial news can help. To know when your business is being affected, you may want to keep an eye on internal metrics, like your costs or sales, or how long it takes clients to pay invoices. Many businesses know they are in the midst of a recession when they see their revenue decrease, alongside an increase in costs.
What steps can I take now to protect against a recession in 2023?
Below are some steps you can take now to protect yourself against a recession:
- Get professional financial guidance to set up your business for long term success.
- Evaluate your business and market to attract new customers.
- Review your costs to make cuts.
- Review employee arrangements and consider independent contractors as a cost-cutting measure.
- Renegotiate your contracts with vendors to reduce costs and waste.
- Get financing to ensure sufficient working capital to operate.
- Learn about the importance of incorporation during a recession.
If you have more questions about operating your business during a recession, reach out to a Rocket Lawyer network attorney for affordable legal advice. If you need tax help, Rocket Lawyer can now match you with a tax pro for affordable and convenient tax filing services. Don't do your taxes™ – Let us do them for you.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.