Navigating rough weather: how to prepare for a recession

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In the volatile landscape of business, economic downturns are an unfortunate reality and, depending on whose predictions you listen to, the next one is right around the corner.

The impacts of a recession can be particularly harsh on small businesses, which is why it is so important to think about these things now — before things get tough — because with careful planning and strategic foresight, you can face a recession better prepared to survive the storm. In this guide, we delve into actionable steps to help your business survive a recession (maybe even thrive, but definitely survive). We cover financial resilience, effective employee management, and making tough decisions like selling assets and reducing your workforce.

A quick reminder about recessions and what they are:

A recession, generally speaking, is a prolonged period characterized by the economy shrinking (called “contraction”), and it’s usually seen most clearly in decreased consumer spending, lower economic growth (GDP, specifically), and increased unemployment rates.

To effectively prepare for a recession, business owners must first recognize the signs and stay attuned to economic indicators. This vigilance will allow you to proactively prepare your business before the storm hits. Periodically looking at GDP data and keeping up with business news is a good way to do this.

Financial preparation is the single most crucial aspect of preparing for an economic downturn, but it’s not easy to build an emergency fund that can sustain multiple years of expenses without the sales to support them — after all, with that kind of cash in the bank your business could afford to expand capacity or target new markets or territories.

That being said, have as much in savings as you can — if a year’s worth of expenses is possible, then it in the bank. The first 12 months will be critical, particularly after a recession is officially announced (though you will likely already see its presence well before the economic data confirm it). People will panic and fire their employees, cancel contracts and orders, and generally demonstrate their lack of preparedness when a recession strikes — which exacerbates the problem in the near term.

A couple of other things to work toward while the skies are blue:

1. Trim Unnecessary Costs. Similar to our previous commentary about looking at your business expenses and identifying areas where you can cut unnecessary (and hidden) costs, here is where it really counts. When it becomes survival over margin, pennies matter more than ever — trim the fat without compromising the quality of your offerings or the morale of your workforce.
2. Diversify Revenue Streams. This will become painfully apparent when a recession hits. Over-reliance on a single product or service can spell disaster. Diversifying your revenue where possible can help stabilize your cashflow by spreading risk across multiple areas. If your products and services serve the right spaces, then you might not see any change in those areas at all — it can be the difference between having to supplement (or replace!) half of your company’s income with your emergency fund versus all of it.

You hired your people for a reason and, if you followed our advice, you should have invested a lot into them (and reaped rewards from it many times over). Now it’s time to protect your investments. Here are some things to consider when considering your headcount:

1. Transparency. Be open and honest with your employees. They know what’s happening and that knowledge can overwhelm them with worry and fear. Keep them informed about the potential challenges your business is facing and involve them in brainstorming solutions. When employees understand the situation, they can contribute to meaningful solutions.
2. Cross-Training and Skill Enhancement. We talked about cross-training employees as a small part of redundancy, but here is where it will be critical. Make sure your people can handle multiple roles within your business. If you’ve been doing this from the start, your business is probably pretty lean already. If you haven’t, then it will make your workforce more adaptable and reduce the impact of losing key employees during economic uncertainty.
3. Implement Flexible Work Arrangements. Consider offering flexible work arrangements, such as remote work or reduced hours, to manage labor costs while retaining your skilled employees. And remote work might even save you a few bucks on overhead costs in the process.

But sometimes that just isn’t enough. Sometimes even the most prepared businesses eventually have to make tough decisions. If that time comes, you have to triage. Two things to start with:

1. Identify Non-Core Assets. During a recession, it’s crucial to identify non-essential or underperforming assets that could be sold to generate capital. Evaluate which assets are integral to your business and which can be let go.
2. Strategic Liquidation. This is a delicate balancing act. When deciding to sell assets, a strategic approach is a must. Sell assets with demand in the market and which can fetch reasonable prices, but make certain you’re not hurting your ability to serve your customers — liquidate assets that aren’t directly contributing to revenue or customer experience.

When it comes to employees, it’s an even more delicate balance. Your people have given you their loyalty, and now they deserve yours. For starters:

1. Evaluate Essential Positions. Identify the roles that are absolutely essential for your business and ensure that they are retained to maintain the core functions of your business.
2. Temporary Measures. Before resorting to layoffs, explore temporary measures such as reduced workweeks or unpaid leave (sometimes called furloughs). These measures provide flexibility, maintain the connection with your workforce, and reduce costs.
3. Offer Voluntary Departures. Consider offering voluntary separation packages to employees who are considering leaving for personal reasons or retirement. Be as generous as you can (remember their loyalty to you).
4. Involuntary Layoffs are a Last Resort. In the unfortunate event that layoffs become unavoidable, handle them with empathy and transparency. Provide affected employees with proper support, such as severance packages and assistance in finding new opportunities.

In the world of business, adversity is an inevitability. However, proactive preparation and methodical growth beforehand can position your business to better weather the storms. Building financial resilience, fostering effective employee management, and making tough decisions about assets and your workforce will be your compass as you navigate through the uncertainties of a recession. Remember, preparedness is not about avoiding challenges; it’s about handling them with a strategic mindset. Your company’s future success hinges on the actions you take today.