by Tim Mages
October 14, 2019
It’s easy to forget that the Great Recession was just a decade ago. Today, the national unemployment in the United States sits at just 3.7%—a far cry from the record high 10% in 2009. Although there is no stock-buying mania on Main Street like there was in 1999, and no economic promise that "this time is different"—we cannot forget that millions of Americans learned their lessons the hard way.
First and foremost, lessening the impact of a future recession on your company comes down to planning. It’s often said, “Don’t ride the highs too high or the lows too low.” A team’s ability to prepare in advance by taking steps that lessen the recessionary impact is key for small businesses everywhere.
Wall Street and financial mavericks and mavens can argue all day about when the next recession will hit, but the reality is, economies fluctuate and another recession is not an if, but a when. Here are some thoughts to help small business owners plan early and to manage or navigate through the next recession.
Like anything in life, it is easier to fix your problems here and now, alongside a strong economic tailwind, versus being reactive during the next downturn. While not exhaustive, each thought provides steps to consider. The following is a checklist for preparing for a recession.
1. Cash Is KingPart of the challenge with a recession is we never know in advance how it will impact the business. It is easy to think about direct impacts to your revenue from a slowing economy, but how will your business hold up if a customer goes bankrupt and can’t pay for work already completed by your business? Or a supplier is unable to meet your needs and immediate short-term alternatives double your initial cost estimates? Your cash reserve, whether it is cash on hand or availability through your lenders, is first and foremost in managing any challenges.
2. Measure Productivity Balance declining top-line trends by identifying as many variable costs in your business as possible, including underperformers. During the last economic downturn, many businesses planned for a 15% decrease in revenue to equate to a 15% reduction in payroll. In reality, this turned deadly.
As downward trends continued and sales dropped 30% to 40%, it was a challenge for businesses to catch up. Prepare for the long term by identifying ways for the entire team to do more with less from the start.
3. Assess Your Meaningful SuppliersIf you have not recently assessed your meaningful suppliers, now may be a good time to review their market position. Research what other customers are saying about your supplier, have discussions with them and their preparations for a downturn, and pull data or review industry sources to assess their business performance and risk.
This is good business practice even in growth years, but becomes even more critical ahead of a recession. Nothing can disrupt your business and your reputation more than a supplier you rely on suddenly having a major “hiccup.” Don’t allow the success or failure of your suppliers to define the fate of yours.
4. Manage Customer Concentration Diversifying your customer base could be the difference between exiting a recession strong or “limping” into the next growth cycle. A multibillion dollar customer that is 30% of your business is a liability, not a safety net. While your high-performing customers will likely survive a recession, financial strain could pressure them to take actions that put your contract at risk. Consider any one customer comprising over 10% of your total revenue a liability and work now to diversify.
5. Reduce LeverageNow is a difficult time to take on additional debt or leverage to acquire equity interests of other owners, execute on an acquisition, or to enter into a risky project with a long-term payback. Many companies took on large amounts of debt during 2007, only to encounter many challenges over the next 4 to 7 years dealing with reduced revenue and the impact on meeting obligations to debt holders. Our company is constantly examining financial projection stress tests to assess our overhead feasibility at various leverage levels should revenue decrease.
6. Shop for Options Ahead of TimeBetween 2008 and 2012, 465 banks failed. If your company relies only on lines of credit from your bank, consider the impact of your bank closing or shutting off lending to your industry segment. Make the time to talk to alternative financing sources.
Should an immediate need emerge that requires additional capital, be sure to have your options identified and understood beforehand, rather than when you’re in a pinch.
ABOUT THE AUTHOR
Tim Mages is the chief financial officer of Expansion Capital Group (ECG), a business dedicated to serving American small businesses by providing access to capital and other resources so they can grow and achieve their definition of success. Since its inception, ECG has provided approximately $350 million in capital to over 12,000 small businesses nationwide.