by Jay Jung, founder and managing partner at Embarc Advisors
Recessions are hard for everyone, but some of the people who are hit the hardest are small business owners. These businesses are often struggling to stay afloat as it is, and economic downturns like recessions — and the difficulties that come with them — are only another challenge they’re forced to face.
To make it through these tough times, small businesses must be proactive and focus on having a plan to allow their business to continue operating despite the circumstances.
1. Plan for different scenarios.
When planning for a recession, it’s crucial to plan for several different scenarios. You never know how severe a recession will be, or how long it might last. While it may be impossible to expect every challenge that will come your way, small business owners should prepare for as many potential obstacles as possible so that they aren’t caught off-guard if (or when) the worst-case scenario happens.
2. Know and explore your financing options.
Once a recession does hit, the truth of the matter is that everyone will be looking for financing, lenders will be tightening restrictions, and it’s going to be much more difficult for small businesses to get a loan. Even if your own small business is able to successfully find financing, it will likely be at a much greater cost, which is why small businesses must be proactive about their funding.
If your finances are healthy ahead of the recession, your business will be able to stay much healthier once an economic recession becomes an inevitability. You must seek financing when you anticipate that you may need it, not once it is an urgent need. By that point, it may be too late to secure that funding, which will leave your business unprepared to deal with the crisis and will put you under.
3. Preserve your cash flow.
Sequoia Capital, one of the leading venture capital firms, recently issued a warning to its portfolio companies to conserve cash. This applies to all small businesses, not just tech startups. One of the crucial things that a small business owner must do heading into a recession is manage their cash flow. In a recession, everyone is struggling — including your customers — so keep in mind that your business will likely be losing its primary revenue stream. Understanding where your money is coming from, and where you are spending it, is the first step in reducing operational costs to keep your business afloat. Tracking cash flow on a weekly basis with a 13 week forecast is recommended.
In order to best help your business stay afloat during a crisis such as an economic recession, ensure that you keep your income streams diversified. When your primary income stream falls short, having ancillary revenue can make up for those shortcomings. The adage “don’t keep all of your eggs in one basket” is one that rings especially true during a recession.
4. Form strong customer relationships.
Strong customer relationships can also be a make-or-break factor in whether your small business survives a recession. If you have customers devoted to supporting your business, they will stick with you through times when they are struggling. Repeat business can be a significant driver of profits when it becomes challenging to attract new customers.
Happy customers are also one of the best forms of marketing, and one that can help you find new business. Referrals are a great way to draw in business at a cost up to five times lower than it takes to advertise to prospective new customers. As such, perhaps the best thing that a small business owner can do in a recession is to ensure the quality of their service.
5. Understand the importance of marketing.
Marketing can also be an important factor during a recession. It’s important not to overspend, as spending too much on marketing — especially forms of marketing with a low ROI — can cause your business to go under more quickly. On the other hand, having a targeted marketing strategy could ensure you are maintaining a steady and comfortable customer base. Measuring key metrics such as conversion rate, return-on-ad-spend and customer acquisition cost is going to be increasingly important and companies should start building this muscle sooner rather than later.
If a small business is prepared for the difficulties it will face in a recession, it can manage to survive it and benefit from the post-recession boom. The COVID-19 pandemic showed many small businesses the urgency of preparing for an economic downturn. Taking steps like focusing on the quality of your service and maintaining ancillary revenue streams can ensure that your cash flow is sustainable for your business to survive.
Jay Jung is the founder and managing partner at Embarc Advisors, which brings Fortune 500-level financial consultations to middle-market, SMBs, and startups. Jay has nearly 20 years of experience in M&A, capital-raising, and corporate finance as a former Goldman Sachs Investment Banking Vice President and McKinsey & Company Engagement Manager.