Recessions and downturns can be difficult times for small companies. With limited resources, small businesses may be more vulnerable to economic slowdowns. However, with the right preparation and execution, small companies can weather a recession and come out stronger on the other side.

Before the Downturn

Although downturns and recessions are difficult to predict, it is wise to remain aware of market forecasts and heed the warnings that analysts communicate. It is better to plan for the worst and hope for the best than to be unprepared for the worst.

Build up Cash Reserves

The most important step for any company heading into a downturn is to build up cash reserves. Having a cash reserve will allow a small company to continue paying for fixed costs without going under even if sales dip. Planning how much cash the company should build up is also important and should take into consideration elements such as expected length of the economic downturn and expenses forecasted for the duration of the slowdown.

Reduce Costs

In preparation for a recession, small companies should identify areas where they can reduce costs. This could include renegotiating rent or lease agreements, cutting back on unnecessary expenses, downsizing, or finding less expensive components. If none of these options are feasible, companies should consider efficiency increases. One of the best ways to increase efficiency is to digitalize. Mondro can help with digitalization projects. To find out more, read our article on Why Digitize and Automate?

Increasing efficiency can allow small companies to operate more efficiently during a recession, with an indirect effect of cost savings. This can include automating processes, streamlining operations, and investing in technology. However, efficiency increases almost always come with the need to invest. The best moment to invest in initiatives which will increase efficiency is before a downturn and not during, at which point conserving cash becomes more important.

Review Business Strategy

Reviewing and adjusting business strategy is necessary before a slowdown. For instance, significant growth investments may need to be put on ice until the downturn passes to ensure the cash burn rate is maintained at a steady pace. Adjusting the products and services strategy, like opening the business to new segments, can spread risk and increase revenue streams. Preparing for more active promotion, such as physical or online advertisement, will also help. This can be done by increasing online presence and preparing pamphlets for distribution.

Communicate

Communicating with employees and partners is an important part of preparing for a downturn. Small companies should be transparent about the potential impact of a recession and work with employees to develop a plan to weather the storm.

Prepare to Act Fast and Make Difficult Decisions

In an economic slowdown, decisions must be made quickly. Being correctly prepared by putting in place the steps above will help a company remain agile when the time to execute comes. Preparing also means spending money, a luxury which becomes unavailable during a downturn. Do it while it’s time. There is also the chance that in the worst-case scenario, some unfortunate actions, such as layoffs, may be necessary. Being mentally ready for such decisions is absolutely necessary.

During the Downturn

When a downturn hits, the indicators will be pretty clear. Sales will slump quite quickly. But if the company prepared adequately, reacting will most likely be easier and the impact on the business will be less severe than without preparation.

Monitor Cash Burn Rate

First, monitoring the cash burn rate and the bank account balance is absolutely necessary. The last thing that a company wants is to run out of cash without sales to replenish the balance. To have visibility on cash burn rate, an online accounting and bookkeeping software such as QuickBooks Online is paramount.

Reduce Prices While Maintaining Margins

If cost reduction initiatives were put in place but prices maintained, the business may enjoy a slight increase in margins before the slowdown. However, when the slowdown hits, the most important aspect is not to maintain prices but maintain sales volumes and acceptable margins. Reducing prices to pre-cost-reduction levels will boost sales, maybe just enough to maintain volumes and ultimately help go through the downturn. It is important to keep in mind that to be agile on pricing and have visibility on margins, electronic price lists are absolutely necessary. For more on price lists, read the articles on Creating and Maintaining Price Lists.

Advertise

Slightly increasing the amount of inexpensive promotion like social media on online marketing will also have the effect of improving the volume of revenue with new customers, effectively maintaining sales. And while getting more business will help, building strong relationships with existing customers will ensure current revenue streams are kept at a relatively steady level.

Takeaway

In conclusion, recessions, downturns and slowdowns can be difficult times for small companies. But by correctly preparing before the downturn through built up cash reserves, reduced costs, adjusted business strategy, communication and mental preparation, small companies will do all in their power to be ready. And if companies take the right steps during the downturn, they will not only weather the challenge but come out stronger after. While it may be impossible to predict when a recession or downturn will happen, as being as prepared as possible will mitigate risks and maximize opportunities.